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Treasury Officials Mull Credit Default Solutions


Might want to make note of this date: October 17th, the day the Treasury Department says it will begin running out of money to pay its bills unless Congress extends the federal debt limit in some way.

The prospect of the government running out of money is an especially scary one for financial markets. Treasury debt plays a fundamental role in the global economy and economists agree that a debt default by the United States would have dire consequences. Republicans insist a default doesn't have to happen. So let's look at the two sides' arguments.

Here's NPR's Jim Zarroli.

JIM ZARROLI, BYLINE: Republicans insist that talk about a government default is nothing more than White House scare tactics, an attempt to pressure them to capitulate. They say the government may have less money to spend as the weeks drag on, so it will have to make choices about what to spend money on. But Senator Rand Paul of Kentucky, speaking on NBC's "Meet the Press" this weekend, said the government can still pay the interest on its debt and he said he wouldn't have it any other way.

SENATOR RAND PAUL: I am for taking default completely off the table and promising to the American people and to the markets, to Wall Street, that we will always pay the interest on the debt as a priority.

ZARROLI: In fact, the House passed a bill in May requiring the government to make interest payments a priority. It was an attempt to reassure the financial markets by ruling out a default, but it never got through the Democratic-controlled Senate.

Jack Ablin, chief investment officer of BMO Private Bank, says the idea of prioritizing interest payments isn't new. He says Rhode Island tried it a few years ago.

JACK ABLIN: When they ran into fiscal trouble, they said we're going to change the priority of our payments. We're going to pay bondholders first and then pensioners second.

ZARROLI: Ablin says the federal government could try something similar this time around, and it might calm the financial markets somewhat, but it would be at best a temporary measure.

ABLIN: It would be the equivalent of throwing a bucket of water on a house fire.

ZARROLI: Ablin says if the money began to run out, the federal government would be confronted with some painful choices about what bills to pay. President Obama said as much in his news conference yesterday.

PRESIDENT BARACK OBAMA: We've got a lot of other obligations, not just people who pay Treasury bills. We've got senior citizens who are counting on their Social Security check arriving on time. We have veterans who are disabled who are counting on their benefits.

ZARROLI: And if the government stops paying veterans and senior citizens so it can make interest payments to bond investors in places such as China and Japan, it's not going to sit well with American voters. So even if Congress promises to make all of its bond payments on time, a lot of investors may not buy it.

Scott Brown, chief economist at Raymond James, says that's especially true if the economy begins to decline - which could happen if the government shutdown drags on too long.

SCOTT BROWN: I mean clearly, it's not going to be sustainable. You're talking a major hit to the overall economy. A major recession in the U.S. if not a depression, and that's going to echo around the world as well.

ZARROLI: Like most economists, Brown thinks a government default is highly unlikely, but the longer the stalemate drags on, the more nervous investors are likely to become.

BROWN: You're seeing it right now in the Treasury bill market. If you look at the four-week bills, the yields have popped substantially higher in the last week suggesting that the market really sees some positive probability that they could default.

ZARROLI: At the same time, China and Japan - each of which holds more than a trillion dollars in U.S. Treasury debt - yesterday urged the U.S. government to resolve the dispute. Japan's prime minister said a U.S. default could have a large international impact. The U.S. can pledge not to let the current standoff disrupt the markets, but its creditors are looking for actions, not words.

Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.

Jim Zarroli is an NPR correspondent based in New York. He covers economics and business news.