News / Economy

What Would a US Default Look Like?

Goldman Sachs Group, Inc., Chairman and CEO Lloyd Blankfein, right, accompanied by Bank of America CEO Brian Moynihan, speaks to reporters outside the White House in Washington on Oct. 2, 2013, after they and other financial leaders met with President Barack Obama regarding the debt ceiling and the economy.
Goldman Sachs Group, Inc., Chairman and CEO Lloyd Blankfein, right, accompanied by Bank of America CEO Brian Moynihan, speaks to reporters outside the White House in Washington on Oct. 2, 2013, after they and other financial leaders met with President Barack Obama regarding the debt ceiling and the economy.
Reuters
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 Oct.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.
 
October 17
 
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.
 
October 18 - October 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 Oct. 22, when the government takes in $3.5 billion more than it spends.
 
But that temporary gain is soon erased. Oct. 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.”
 
October 30
 
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.
 
October 31
 
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.
 
November 1
 
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.
 
“A default would be unprecedented and has the potential to be catastrophic,” the Treasury said in a report on Thursday. “The negative spillovers could reverberate around the world.”

You May Like

UN Ambassador Power Highlights Plight of Women Prisoners

She launches the 'Free the 20' campaign, aimed at profiling women being deprived of their freedom around the world More

Satellite Launch Sparks Spectacular Light Show

A slight delay in a satellite launch lit up the Florida sky early this morning More

Fleeing IS Killings in Syria, Family Reaches Bavaria

Exhausted, scared and under-nourished, Khalil and Maha's tale mirrors those of thousands of refugees from war-torn countries who have left their homes in the hopes of finding a better life More

This forum has been closed.
Comment Sorting
Comments
     
by: Tracy from: Missouri
October 05, 2013 8:47 PM
There is no reason to allow any of them to keep their jobs. http://en.wikipedia.org/wiki/Constitutional_Convention_(United_States) We made back up a long time ago to cover our asses if we had such severely incompetent leaders.

by: ali baba from: new york
October 05, 2013 2:48 AM
the budget crisis is the fault of president Obama . he spends billion dollars by browning to unnecessary war in Afghanistan. he is keeping spending money and load the country into debt.it is time to cut spending .his Obama care program will bankrupt the country. he should look for other health benefit in Canada ,England or Italy. His program will cause debt crisis will get worst .

by: John from: Chevy Chase
October 04, 2013 5:10 PM
So we the 99% of the people always have to pay for the 1% of bankers and lobbies?The debt is so high because we paid the bankers' mistakes.Raising the ceiling means more debt that means more taxes or social cuts.It means common people are going to pay.Bankers and military lobbies still earn a fortune.A default would instead clear this huge debt,punish the bankers who bought all those Tbonds and resurrect the moral hazard that's been forgotten.It would shut down services for a while but it would be worth it.

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Nobel Prize Winner Malala Talks to VOAi
X
August 31, 2015 2:17 AM
Nobel Peace Prize winner Malala Yousafzai met with VOA's Deewa service in Washington Sunday to talk about women’s rights and unveil a trailer for her new documentary. VOA's Katherine Gypson has more.
Video

Video Nobel Prize Winner Malala Talks to VOA

Nobel Peace Prize winner Malala Yousafzai met with VOA's Deewa service in Washington Sunday to talk about women’s rights and unveil a trailer for her new documentary. VOA's Katherine Gypson has more.
Video

Video War, Drought Threaten Iraq's Marshlands

Iraq's southern wetlands are in crisis. These areas are the spawning ground for Gulf fisheries, a resting place for migrating wildfowl, and source of livelihood for fishermen and herders. Faith Lapidus has more.
Video

Video Colombians Flee Venezuela as Border Crisis Escalates

Hundreds of Colombians have fled Venezuela since last week, amid an escalating border crisis between the two countries. Last week, Venezuelan President Nicolas Maduro ordered the closure of a key border crossing after smugglers injured three Venezuelan soldiers and a civilian. The president also ordered the deportation of Colombians who are in Venezuela illegally. Zlatica Hoke reports.
Video

Video Rebuilding New Orleans' Music Scene

Ten years after Hurricane Katrina inundated New Orleans, threatening to wash away its vibrant musical heritage along with its neighborhoods, the beat goes on. As Bronwyn Benito and Faith Lapidus report, a Musicians' Village is preserving the city's unique sound.
Video

Video In Russia, Auto Industry in Tailspin

Industry insiders say country relies too heavily on imports as inflation cuts too many consumers out of the market. Daniel Schearf has more from Moscow.
Video

Video Scientist Calls Use of Fetal Tissue in Medical Research Essential

An anti-abortion group responsible for secret recordings of workers at a women's health care organization claims the workers shown are offering baby parts for sale, a charge the organization strongly denies. While the selling of fetal tissue is against the law in the United States, abortion and the use of donated fetal tissue for medical research are both legal. VOA’s Julie Taboh reports.
Video

Video Next to Iran, Climate at Forefront of Obama Agenda

President Barack Obama this week announced new initiatives aimed at making it easier for Americans to access renewable energy sources such as solar and wind. Obama is not slowing down when it comes to pushing through climate change measures, an issue he says is the greatest threat to the country’s national security. VOA correspondent Aru Pande has more from the White House.
Video

Video Arctic Draws International Competition for Oil

A new geopolitical “Great Game” is underway in earth’s northernmost region, the Arctic, where Russia has claimed a large area for resource development and President Barack Obama recently approved Shell Oil Company’s test-drilling project in an area under U.S. control. Greg Flakus reports.
Video

Video Philippine Maritime Police: Chinese Fishermen a Threat to Country’s Security

China and the Philippines both claim maritime rights in the South China Sea.  That includes the right to fish in those waters. Jason Strother reports on how the Philippines is catching Chinese nationals it says are illegal poachers. He has the story from Palawan province.
Video

Video China's Spratly Island Building Said to Light Up the Night 'Like A City'

Southeast Asian countries claim China has illegally seized territory in the Spratly islands. It is especially a concern for a Philippine mayor who says Beijing is occupying parts of his municipality. Jason Strother reports from the capital of Palawan province, Puerto Princesa.
Video

Video Ages-old Ice Reveals Secrets of Climate Change

Ice caps don't just exist at the world's poles. There are also tropical ice caps, and the largest sits atop the Peruvian Andes - but it is melting, quickly, and may be gone within the next 20 years. George Putic reports scientists are now rushing to take samples to get at the valuable information about climate change locked in the ice.

VOA Blogs

World Currencies

EUR
USD
0.8916
JPY
USD
121.32
GBP
USD
0.6487
CAD
USD
1.3252
INR
USD
66.401

Rates may not be current.