Treasury Warns Default Impact Could Last A Generation

By Tyler Durden
Created 10/03/2013

The President warned yesterday that “this time is different,” and now the Treasury has weighed in with an even more ominous warning. In their statement, they note:

  • *TREASURY OFFICIAL: CONGRESS ACTION ONLY WAY TO AVOID DEFAULT
  • *TREASURY SEES ‘TENTATIVE’ SIGNS IMPASSE AFFECTING MARKETS
  • *TREASURY SAYS BILL YIELDS MAY REFLECT `NASCENT CONCERNS’
  • *TREASURY: DEFAULT IMPACT COULD BE PROFOUND, LAST A GENERATION

And so it seems not only are they looking at the same indicators as the smart money in the markets but it is clear that the rhetoric will be increased until the equity market cracks and the politicians get their catalyst to act.

Via The Treasury,

The United States has never defaulted on its obligations, and the U. S. dollar and Treasury securities are at the center of the international financial system. A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, thenegative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.

Full Treasury Statement can be found here [7].

What is amusing among all this blatant fearmongering, is that the Treasury can clearly choose to prioritze its payments and have more than enough cash from tax revenues alone to fund its debt obligations for a long period of time, even if that means not paying some of the government’s other ultrabloated programs.

From: Treasury “X Date” May Hit As Soon As October 18 [8].

Priotiziation, or selective payment of obligations.

It would be as follows:

  • If we reach the X Date, Treasury might either prioritize payments or make full days’ worth of payments once they receive sufficient revenues to cover all of a day’s obligations.
    – Interest on the federal debt would likely be prioritized in either scenario – it is paid on a separate computer system (FedWire).
  • Scenario # 1: Pay some bills, but not others
    – Treasury might attempt to prioritize some types of payments over others. Prioritized payments would be made on time, others would not.
    – This option may not be possible to implement using Treasury’s current financial systems. It would involve sorting and choosing from nearly 100 million monthly payments.

If the X Date arrives on October 18 (the beginning of the BPC range):

  • Treasury would be about $106 billion short of paying all bills owed between October 18 and November 15 (20 business days).
  • Approximately 32% of the funds owed for the period would go unpaid.
  • The reality would be chaotic:
    – Unfair results, unanswered questions
    – Treasury picking winners and losers
    – Public uproar
    – Intense global media focus

 [9]

 [10]

  • Scenario # 2: Make all of each day’s payments together once enough cash is available
    – Treasury might wait until enough revenue is deposited to cover an entire day’s payments, and then make all of those payments at once.
    (For example, upon reaching the X date, it might take two days of revenue collections to raise enough cash to make all of the payments due on day one. Thus, the first day’s payments would be made one day late. This, of course, would delay the second day’s payments to a later day.)
    – In the 2012 OIG report, some senior Treasury officials stated that they believed this to be the most plausible and least harmful course of action.
    – Since debt operations are handled by a separate computer system, these payments could likely still be prioritized under this scenario.

Full report from the Bipartisan Policy Center on the debt ceiling contingenies can be found here [11].

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Source URL: http://www.zerohedge.com/news/2013-10-03/treasury-warns-default-impact-could-last-generation

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