Debt limit D-day to spell tough choices for Obama
If Congress does not raise the limit on U.S. government debt before the specter of default becomes reality this summer, President Barack Obama will need to decide which bills to pay -- and choose between market mayhem and a firestorm over missed benefit payments.
The Obama administration and lawmakers are locked in talks over how to curb mounting U.S. debts, with Republicans pushing for deep spending cuts as the price for their support in raising the $14.294 trillion debt limit.
The government expects to reach that limit on Monday, and the Treasury Department said it is halting some investments in federal employee pensions funds in order to issue fresh debt.
The deficit reduction talks, however, appear to be going nowhere fast and threaten to extend to August 2, the date the Treasury has said it will run out of maneuvering room to avoid a default on U.S. obligations.
With that in mind, the Treasury is mulling plans for which obligations will not be met. None of the options look good.
Deciding to continue paying interest on the debt could prevent a financial crisis in which interest rates rise sharply and investor confidence in the United States is shattered.
But that could mean halting or delaying payments for programs like Social Security, a politically unpalatable move that would ignite criticism that Obama is favoring Wall Street and U.S. creditors, including China, over the elderly and military troops.
"Not paying troops and senior citizens, not giving states their share of the Medicare (health insurance) money, those things are unthinkable," said Andy Laperriere, a managing director with International Strategy & Investment who analyzes the financial market implications of policy actions.
Laperriere believes the stark options will drive lawmakers to support a debt limit hike, but the Treasury has been quietly laying plans in case push comes to shove, and analysts say debt payments would likely take precedence over other obligations.
"Defaulting on the actual Treasury debt poses a greater risk than making a late payment on other things," said Donald Marron, a former acting director of the Congressional Budget Office. "If you don't pay Medicare doctors for a week, it's bad, but there is not major spillover from that," he said.
Some Republicans have backed legislation that would require the Obama administration to ensure that interest on the debt is paid first if the Treasury is no longer able to borrow.
That plan has been called unworkable by Treasury Secretary Timothy Geithner, who contends that failing to meet any obligation would be tantamount to a default because it would show Washington is no longer standing behind its commitments.
Aware of the likely political cost of cutting off funding for popular programs, the White House and Treasury have been pre-emptively arguing that a failure to raise the debt limit would be a sign of Republican intransigence.
Privately, however, they fear the blame for the resulting economic turmoil would end at the president's door.
Many analysts do not believe the standoff would play out like the government shutdown in 1995, when Republicans were widely blamed by voters -- a sentiment which helped President Bill Clinton win re-election the following year.
"The president is captain of the ship," said Stu Rothenberg, a non-partisan political analyst who spent the past week talking to strategists from both parties about the likely fallout of a default.
"Democrats are terrified," he said. "If the country hits a serious financial bump, the president would be hurt, because he's in charge," Rothenberg said. "Whether or not he had anything to do with it, he gets blamed."
Thinking the Unthinkable
While debt payments may top the priority list, Social Security and Medicare checks would be a close second.
The government is on track to spend $3.6 trillion this fiscal year. Roughly a third of that is allotted to cover the costs of these two programs.
Some 60 million elderly and disabled Americans were receiving Social Security benefits at the end of last year, with nearly 50 million on Medicare.
With all 435 members of the House of Representatives, a third of the Senate and President Barack Obama gearing up for elections in 2012, it would be hard not to put these popular programs near the top of the list.
"The administration and politicians of every stripe would want to give them priority. The public is very concerned about making those payments," said Isabel Sawhill, senior fellow economic studies at the Brookings Institution think tank.
John Koskinen, the White House budget official who had to formulate a plan for payments during two government shutdowns in 1995 -- but never had to deal with a default -- said there is no option but to prioritize.
If the federal government defaults this summer, Koskinen said, you have to pay "the debt, Social Security, Medicare, Medicaid and defense. You need to pay as many people as possible who are expecting payment -- and they are the key programs."
"But once you have made those, you are already in the hole. You have to start looking at beginning to shut everything else down. Whatever you do, it would probably be the biggest financial challenge the government has had in its history."
[Source: By Tim Reid and Rachelle Younglai, Reuters, Washington, 16may11]
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