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What would a U.S. default look like?
Nobody knows exactly when America would default on its bills if Congress fails to raise a cap on government borrowing. But the recent past gives a pretty good idea of how a default could unfold.
Even the Treasury Department can’t know how much tax revenue will come in each day after October 17, when it expects to hit its $16.7 trillion debt ceiling. Nor can officials anticipate exact costs, such as how many people will apply for jobless benefits that week.
Yet we can infer how quickly the government might run out of cash by looking at the equivalent of the Treasury’s daily bank statements from that same period a year ago.
What follows is a timeline that shows what a default might look like, based on daily Treasury statements from October and November of 2012.
The Treasury Department exhausts all available tools to stay under the cap on borrowing and can no longer add to the national debt. Treasury expects it would still have about $30 billion cash on hand to cover its bills. Among the many inflows and outflows that day, it takes in $6.75 billion in taxes but pays out $10.9 billion in Social Security retirement checks. By the end of the day, its cushion has eroded to $27.5 billion.
OCT. 18 – OCT. 29
Treasury’s cash reserve quickly dwindles. Washington only takes in about 70 cents for every dollar it spends and is now unable to issue new debt to cover the difference.
The tide turns briefly on October 22, when the government takes in $3.5 billion more than it spends.
But that temporary gain is soon erased. October 24 is an especially rough day: Treasury pays $1.8 billion to defense contractors, $2.2 billion to doctors and hospitals that treat elderly patients through the Medicare program, and $11.1 billion in Social Security, while taking in only $9.6 billion in taxes and other income.
One possible wild card: Treasury could lose the trust of the bond market.
Even though the government cannot add to the national debt at this point, it can legally roll over expiring debt. Investors have the opportunity to cash out about $100 billion worth of U.S. debt every week but choose to reinvest it. If fear of default causes investors to steer clear of new debt offerings, Treasury’s finances could unravel almost overnight.
“It’s very hard to predict,” said Brian Collins, an analyst at the Bipartisan Policy Center, which helped Reuters with this analysis. “It’s the same thing that causes (bank) runs or credit markets to freeze.”
Default happens. By the end of the day, the government is $7 billion short of what it needs to pay all of its bills.
So who gets stiffed?
Everybody, according to the Obama administration.
Treasury says it doesn’t have the ability to pick and choose who gets paid. The last time the government faced this situation in 2011, they planned to wait until public coffers were full enough to pay a full day’s bills before cutting any checks, according to a Treasury Department watchdog report from 2012.
That would mean delays for everybody: the local schools that are owed $680 million, welfare recipients owed $553 million and defense contractors owed $972 million.
Some companies that count the government as a major customer would take a big hit. “If you’re Lockheed Martin … it’s a big deal,” said R. Bruce Josten, the U.S. Chamber of Commerce’s top lobbyist.
Payment delays would grow longer as the default continues, sapping billions of dollars out of the economy within days.
Things get really spooky on Halloween when a $6 billion interest payment to bondholders comes due.
U.S. Treasury bills are the foundation of the global financial system, a supposed risk-free investment that underpins everything from retirement portfolios to China’s export-driven economy.
A missed payment could shake that foundation. The United States currently pays some of the lowest interest rates in the world due to a strong history of repayment; those borrowing costs would almost certainly rise. Stock markets could tumble and nervous consumers could spend less of their money, further damaging the economy.
For the Treasury Department, this is where the truly tough decisions begin. Does the government pay bondholders in China or troops in Afghanistan? The Obama administration says it doesn’t have the ability to prioritize payments, but analysts are convinced it would at least try.
“Not making an interest payment on time is probably a worse way to default than not making other payments,” Collins said.
At this point, the United States goes into truly unchartered territory.
In theory, the government could keep bondholders whole indefinitely because tax revenues are more than enough to cover interest payments, and Treasury pays creditors through a separate system than other obligations.
That would mean longer delays for everybody else. U.S. troops could fall behind on their rent payments, and seniors who rely on Social Security may have trouble buying groceries.
If, on the other hand, the Treasury missed the Halloween interest payment and Washington shows no sign of resolving the crisis, the creditworthiness of the country could suffer. That would throw the value of almost every financial instrument into question: the U.S. dollar, bank loans in Asia, the cost of crop insurance in Illinois.