Obama Preps Emergency Plan if Debt Deadline Passes With No Deal

BY Murrey Jacobson  July 28, 2011 at 3:13 PM EDT


With six days left before the debt ceiling deadline arrives, there will be no shortage of reporters trying to glean intelligence from President Obama’s closed-door meeting with Treasury Secretary Tim Geithner Thursday afternoon.

But there’s one thing the Obama administration has begun making clear in the past 24 hours: It’s busy preparing emergency plans for how the government would operate if no debt agreement is passed by Aug. 2 and choices would have to be made about which bills would be paid immediately.

Moreover, officials realize they can’t wait much longer before spelling that out to the public, and to the markets before the end of the week.

“We recognize that we need to explain to the markets what would happen if the debt limit were not raised,” a senior Treasury official told the PBS NewsHour. “Tuesday is the day you lose the ability to borrow new money. We’re going to have to provide clarity about what our plans are.”

Treasury officials, who insisted on remaining anonymous because the situation remains fluid, outlined some of their approach and preparations:

  • Government officials will try to roll over tens of billions of dollars of securities that will mature next week to make sure U.S. creditors are paid on time. Treasury would likely run auctions early in the week to sell the equivalent amount of maturing bonds and interest that it will have to pay later in the week. Outside analysis shows nearly $90 billion of bonds mature next week.

  • Guidance will be provided within the next few days (perhaps as early as Friday) about which of the nearly 100 million checks sent out by the government each month will be paid on time — and which may be delayed. Although several Republican lawmakers have insisted Treasury could separate those payments out, Treasury officials say “the system has never been designed for how to do this.” (Treasury is responsible for about 80 million of those checks, the Pentagon the other 20 million.)

  • Communication will be ongoing “between the folks in government who sell our debt and the primary dealers who buy our debt” to try to minimize any disruptions should the debt ceiling be reached, or should the U.S.’s AAA credit rating be downgraded. That includes investors from China and Japan.

  • Suggestions or rumors have been rejected that the Fed could come to the rescue by directly buying new Treasury bonds or debt outright from the Treasury. Administration officials who have studied the Fed’s charter say that would be an illegal move. The Fed can only buy Treasury securities on the open market — as other funds and countries do — as it did its most recent round of so-called quantitative easing.

  • A hard push back on any move by Standard and Poor’s to downgrade the U.S. credit rating even if there’s a deal, but one that S&P finds it inadequate — as it has threatened to do. “We have no quarrel with how they would treat our failure to raise the debt ceiling. But we think they underestimate our ability in Washington to have a deal to put us on a path to cutting our long-term debt.”

Since the government would not be able to borrow additional monies next week, the U.S. would only be able to cover about 60 cents on every dollar it owes.

At least some of the emergency plans are likely be laid out by Geithner and other Treasury officials Friday, which would also include some explanation of how Treasury will prioritize the government’s payments.

Since the government would not be able to borrow additional monies next week, the U.S. would only be able to cover about 60 cents on every dollar it owes.

What’s less clear is the Fed’s role in preparations for the coming week. An article in the Financial Times Thursday suggested that several Wall Street bankers are increasingly frustrated that they believe the Fed is not discussing its plans for a U.S. downgrade or default.

Fed officials refused to comment directly on the story, but sent the PBS NewsHour this statement:

“In these matters, the Federal Reserve serves as the fiscal agent of the United States government. As such, we have been engaged in operational planning with the Treasury. We expect to be able to give additional guidance to financial institutions when there is greater clarity from the Congress and as Treasury details its specific plans.”

Earlier this month, the Bipartisan Policy Center issued a report that suggested some of the starker choices the Obama administration could face when it comes to prioritizing payments. The report’s author, Jay Powell, spelled out several different scenarios in which some creditors get paid and there are no delays to entitlement and safety net programs like Medicare and Medicaid.

But Treasury officials say that even those scenarios and choices in the report are not quite as clear-cut when it comes to actually issuing checks and paying the bills.

In the meantime, the Obama administration is concentrating its efforts on trying to persuade lawmakers to pass a debt reduction and debt ceiling bill — as well as talking to creditors, investors and funds who buy U.S. Treasuries.

Then on Thursday, the chief executives from top financial firms, including Jamie Dimon of JP Morgan and Lloyd Blankfein of Goldman Sachs, said in a letter to the White House that the consequences of inaction and a possible credit downgrade “would be a tremendous blow to business and investor confidence.”

But others see it differently, as Jacob Goldstein writes at NPR’s Planet Money. He noted that pension funds and other large institutions don’t depend so heavily on credit ratings for their investment decisions about the U.S. Moreover, he writes, downgrading from AAA to AA may not be as dire as has been suggested.

Perhaps the bluntest quote of the day so far appeared in Politico’s Morning Money. It came in the form of an email from Phillip A. Gallagher, a vice-president at Century Bank in Medford, Mass.:

“With all due respect, S&P or any other downgrade from a discredited ratings agency has very little to do with Treasury bond yields,” he writes. “What other instrument provides the liquidity and safety of the U.S. Treasury? Do you think $14 trillion is going to fly to the safety of the Swiss Franc? This is a wholly manufactured political crisis which will get resolved in due time and will likely result in a bond rally … During the past two weeks of ‘crisis,’ the ten year treasury has moved a whopping ten basis points. That is hardly front page news.”

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