Politico: Default Could 'Sink the Whole Boat'

Fiscal Responsibility

Wanted to be sure you saw this article in Politico today on the consequences of failing to pay our nation’s bills. Republicans need to take these warnings from financial experts seriously and work with us on a big, balanced agreement to ensure we pay our bills, reduce the deficit and avoid these catastrophic consequences of default.

Key Excerpts:

“A few prominent Republicans, such as Minnesota Republican Rep. Michele Bachmann, a presidential candidate, say nothing much would happen and blast the administration for its ‘scare tactics.’”

But financial experts say hitting the debt ceiling or coming really close to it would destabilize the markets and the economy. Just how dire the consequences would be is difficult to predict, but many Americans could feel the impact almost immediately.”

Stock markets are almost certain to drop sharply. Some analysts say interest rates for Treasury bills and private borrowing would rise abruptly. Others say the flight to safety might actually make investors dump stocks and buy Treasury securities in the short term.

“The first major hurdle comes on Aug. 3, when the U.S. government is scheduled to pay $23 billion in benefits to Social Security recipients. Only $12 billion in revenue is expected that day, leaving the Treasury $11 billion short — and $20 billion in the red when other scheduled payments for that day are taken into account.”

“Obama said in an interview with CBS News last week that he couldn’t guarantee Social Security payments will go out, a statement that could send retirees and disability recipients into a panic.”

“‘I’d say it’s at risk,’ said Jay Powell, a former senior Treasury Department official now with the Bipartisan Policy Center. ‘The president’s statement is correct on its face. He said he can’t guarantee those payments will be made. Even if you pay nothing other than interest, you can’t guarantee it.’”

“The next D-day is Aug. 15, when Treasury owes $29 billion in interest but will already have missed $54 billion in scheduled payments if the debt ceiling hasn’t been extended.”

“‘I believe Treasury will always make sure, before all other government spending, [it has] enough cash to pay the interest on the bonds. That has to be the highest priority,’ Powell said. ‘If we default on interest payments, we can sink the whole boat.’”

“‘If there is a strong view that the bond interest payment won’t be made, and congressional leaders say they are nowhere near passing an increase in the debt limit, then you would start to see the basic underpinnings of the financial system come undone,’ said a senior strategist at one of Wall Street’s largest banks, who spoke on the condition of anonymity because of the political sensitivity of the issue.”