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

Multimedia Social Media Documenting, Not Driving, Hong Kong Protests

Unlike Arab Spring uprisings, pro-democracy protestors in Hong Kong aren't relying on Twitter and Facebook to organize, but social media still plays a role More

Analysis: Occupy Central Not Exactly Hong Kong’s Tiananmen

VOA's former Hong Kong, Beijing correspondent compares and contrasts 1989 Tiananmen Square protest with what is now happening in Hong Kong More

Bambari Hospital a Lone Place of Help in Violence-Plagued CAR

Only establishment still functioning in CAR's second city is main hospital 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.
The Legacy of Jimmy Carter: The Preacher from Plainsi
X
October 01, 2014 10:45 AM
It is common in the United States to see tourists flock to sites associated with America's presidents. Some are privately owned and others are run by the National Park Service or the National Archives -- but most have helped draw business and people into the towns and cities where they are located. As VOA’s Kane Farabaugh reports, there is one particular presidential hometown that is unique in what it has to offer those who make the trip.
Video

Video The Legacy of Jimmy Carter: The Preacher from Plains

It is common in the United States to see tourists flock to sites associated with America's presidents. Some are privately owned and others are run by the National Park Service or the National Archives -- but most have helped draw business and people into the towns and cities where they are located. As VOA’s Kane Farabaugh reports, there is one particular presidential hometown that is unique in what it has to offer those who make the trip.
Video

Video Hong Kong Protests Draw New Supporters on National Holiday

On the 65th anniversary of the founding of Communist China, Hong Kong protesters are hoping to stage the largest pro-democracy demonstration since the 1989 Tiananmen protests. VOA's Brian Padden visited one of the protest sites mid-day, when the atmosphere was calm and where the supporters were enthusiastic about joining what they are calling the umbrella revolution.
Video

Video India's PM Continues First US Visit

India's prime minister is on his first visit to Washington, to strengthen political and economic ties between the world's oldest and the world biggest democracies. He came to the U.S. capital from New York, the first stop on his five-day visit to the country that denied him an entry visa in the past. From Washington, Zlatica Hoke reports Modi seemed most focused on attracting foreign investment and trade to increase job opportunities for his people.
Video

Video Malaysia Struggles to Stop People Joining Jihad

Malaysian authorities say militant groups like the so-called "Islamic State" have used social media to entice at least three dozen Malaysian Muslims to fight in what they call "jihad" in Syria and Iraq. As Mahi Ramkrishnan reports from Kuala Lumpur, counterterrorism police are deeply worried about what could happen when these militants return home.
Video

Video Could US Have Done More to Stop Rise of Islamic State?

President Obama says airstrikes against Islamic State militants in Syria will likely continue for some time because, in his words, "there is a cancer that has grown for too long." So what if President Obama had acted sooner in Syria to arm more-moderate opponents of both the Islamic State and the Syrian government? VOA State Department Correspondent Scott Stearns reports from the United Nations.
Video

Video Treasure Hunters Seek 'Hidden Treasure' in Central Kenya

Could a cave in a small village in central Kenya be the site of buried treasure? A rumor of riches, left behind by colonialists, has some residents dreaming of wealth, while others see it as a dangerous hoax. VOA's Gabe Joselow has the story.
Video

Video Ebola Patients Find No Treatment at Sierra Leone Holding Center

At a holding facility in Makeni, central Sierra Leone, dozens of sick people sit on the floor in an empty university building. They wait in filthy conditions. It's a 16-hour drive by ambulance to Kailahun Ebola treatment center. Adam Bailes was there and reports on what he says are some of the worst situations he has seen since the beginning of this Ebola outbreak. And he says it appears case numbers may already be far worse than authorities acknowledge.
Video

Video Identifying Bodies Found in Texas Border Region

Thousands of immigrants have died after crossing the border from Mexico into remote areas of the southwestern United States in recent years. Local officials in south Texas alone have found hundreds of unidentified bodies and buried them in mass graves in local cemeteries. Now an anthropologist and her students at Baylor University have been exhuming bodies and looking for clues to identify them. VOA’s Greg Flakus has more from Waco, Texas.
Colonel Steve ‘Spiros’ Pisanos left Greece and came to the U.S. to learn to fly. He flew fighters for the Allies in World War II, narrowly escaping death multiple times.Colonel Steve ‘Spiros’ Pisanos left Greece and came to the U.S. to learn to fly. He flew fighters for the Allies in World War II, narrowly escaping death multiple times.

AppleAndroid

World Currencies

EUR
USD
0.7866
JPY
USD
109.25
GBP
USD
0.6139
CAD
USD
1.1120
INR
USD
61.428

Rates may not be current.