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

South Korea Divided on Response to North’s Cyber Attack

In past five years, officials in Seoul have accused Pyongyang of hacking into banks, government websites, causing chaos and inflicting millions of dollars in damages More

Video Calm Amid Fear in Daily Life in S. Sudan’s Bentiu

Residents have been trying to regain some sense of normalcy, but planning for the future remains uncertain as fear of attacks looms More

2015 Could Be Watershed for Syria Conflict

Republican control of US Senate in January could lead to more aggressive policy against IS militants in Syria - and against regime of Bashar al-Assad 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.
Ugandan Doctors Aid Victims of Sudan's Civil Wari
X
Adam Bailes
December 22, 2014 3:45 PM
In Sudan's state of South Kordofan, the number of amputees as result of civil war is in the thousands, but few have access to sufficient medical help. Adam Bailes recently visited the area and says a small team of Ugandan doctors has been providing remote help, producing new prosthetic limbs for those in need.
Video

Video Ugandan Doctors Aid Victims of Sudan's Civil War

In Sudan's state of South Kordofan, the number of amputees as result of civil war is in the thousands, but few have access to sufficient medical help. Adam Bailes recently visited the area and says a small team of Ugandan doctors has been providing remote help, producing new prosthetic limbs for those in need.
Video

Video Jane Monheit Christmas Special

Chanteuse Jane Monheit sings the holiday classic “Have Yourself a Merry Little Christmas,” and explains why it’s her favorite song of the season.
Video

Video Calm Amid Fear in Daily Life in S. Sudan’s Town of Bentiu

Six months ago, Bentiu was a ghost town. The capital of northern Unity State, near South Sudan’s important oil fields, had changed hands several times in fighting between government forces and rebels. Calm returned in November and since then, residents of Bentiu have been trying to regain some sense of normalcy. Bentiu’s market has reopened there are plans to start school again. But fears of new attacks hang heavy, as Benno Muchler reports from Bentiu.
Video

Video US Business Groups Press for Greater Access to Cuba

President Barack Obama's decision to do all he can to ease restrictions on U.S. trade, travel and financial activities with Cuba has drawn criticism from some conservatives and Republicans. People who bring tourists to the island and farmers who want to sell more food to Cuba, however, think they can do a lot more business with Cuba. VOA's Jim Randle reports.
Video

Video Three Cities Bid for Future Obama Presidential Library

President Barack Obama still has two years left in his term in office, but the effort to establish his post-presidential library is already underway. The bid for the Obama Presidential Library is down to four locations in three states -- New York, Hawaii, and Illinois. As VOA’s Kane Farabaugh reports, each of them played an important part in the president’s life before he reached the White House.
Video

Video Fears of More Political Gridlock in 2015

2014 proved to be a difficult year politically for President Barack Obama and a very good year for the U.S. Republican Party. Republican gains in the November midterm elections gave them control of the Senate and House of Representatives for the next two years -- setting the stage for more confrontation and gridlock in the final two years of the Obama presidency. VOA National Correspondent Jim Malone has a preview from Washington.
Video

Video Sudan School Becomes Target of Aerial Attacks

The school dropout rate is at an all-time high in Sudan's South Kordofan state because many schools have been destroyed during the three-year civil war between the government and SPLA-N rebel forces. Adam Bailes visited Sudan's Nuba Mountains' region and reports many children are simply too scared to go to school
Video

Video VOA Reporter Tours Devastated Peshawar School

Islamist militants wearing military uniforms and strapped with explosives attacked a military run school Tuesday in the northwestern Pakistani city of Peshawar. At least 141 people were killed in the horrific attack, most of them young students. VOA reporter Ayaz Gul visited the devastated school and attended the funeral of the principal who courageously tried to save her students from the deadly attack.

All About America

AppleAndroid

World Currencies

EUR
USD
0.8143
JPY
USD
119.23
GBP
USD
0.6390
CAD
USD
1.1596
INR
USD
63.304

Rates may not be current.