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

    Russian-speaking Muslim Exiles Fear Possible Russia-Turkey Thaw

    Exiled from Russia as Islamic radicals and extremists, thousands found asylum in Turkey

    US Presidential Election Ends at Conventions for Territorial Citizens

    Citizens of US territories like Guam or Puerto Rico enjoy participation in US political process but are denied right to vote for president

    UN Syria Envoy: 'Devil Is in the Details' of Russian Aleppo Proposal

    UN uncertain about the possible humanitarian impact of Russian proposal to establish escape corridors in Aleppo

    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.
    Uganda Unveils its First Solar-powered Busi
    X
    July 28, 2016 4:16 AM
    A solar-powered bus described by its Ugandan makers as the first in Africa has made its public debut. Kiira Motors' electric bus, Kayoola, displayed recently at a stadium in Uganda's capital. From Kampala, Maurice Magorane filed this report narrated by Salem Solomon.
    Video

    Video Uganda Unveils its First Solar-powered Bus

    A solar-powered bus described by its Ugandan makers as the first in Africa has made its public debut. Kiira Motors' electric bus, Kayoola, displayed recently at a stadium in Uganda's capital. From Kampala, Maurice Magorane filed this report narrated by Salem Solomon.
    Video

    Video Silicon Valley: More Than A Place, It's a Culture

    Silicon Valley is a technology powerhouse and a place that companies such as Google, Facebook and Apple call home. It is a region in northern California that stretches from San Francisco to San Jose. But, more than that, it's known for its startup culture. VOA's Elizabeth Lee went inside one company to find out what it's like to work in a startup.
    Video

    Video Immigrant Delegate Marvels at Democratic Process

    It’s been a bitter and divisive election season – but first time Indian-American delegate Dr. Shashi Gupta headed to the Democratic National Convention with a sense of hope. VOA’s Katherine Gypson followed this immigrant with the love of U.S. politics all the way to Philadelphia.
    Video

    Video Philadelphia Uses DNC Spotlight to Profile Historic Role in Founding of United States

    The slogan of the Democratic National Convention now underway in Philadelphia is “Let’s Make History Again” which recognizes the role the city played in the foundation of the United States in the 18th century. As VOA’s Kane Farabaugh reports, local institutions are opening their doors in an effort to capitalize on the convention spotlight to draw visitors, and to offer more than just a history lesson.
    Video

    Video A Life of Fighting Back: Hillary Clinton Shatters Glass Ceiling

    Hillary Clinton made history Thursday, overcoming personal and political setbacks to become the first woman to win the presidential nomination of a major U.S. political party. If she wins in November, she will go from “first lady” to U.S. Senator from New York, to Secretary of State, to “Madam President.” Polls show Clinton is both beloved and despised. White House Correspondent Cindy Saine takes a look at the life of the woman both supporters and detractors agree is a fighter for the ages.
    Video

    Video Dutch Entrepreneurs Turn Rainwater Into Beer

    June has been recorded as one of the wettest months in more than a century in many parts of Europe. To a group of entrepreneurs in Amsterdam the rain came as a blessing, as they used the extra water to brew beer. Serginho Roosblad has more to the story.
    Video

    Video First Time Delegate’s First Day Frustrations

    With thousands of people filling the streets of Philadelphia, Pennsylvania for the 2016 Democratic National Convention, VOA’s Kane Farabaugh narrowed in on one delegate as she made her first trip to a national party convention. It was a day that was anything but routine for this United States military veteran.
    Video

    Video Commerce Thrives on US-Mexico Border

    At the Democratic Convention in Philadelphia this week, the party’s presumptive presidential nominee, Hillary Clinton, is expected to attack proposals made by her opponent, Republican presidential nominee Donald Trump, to build a wall along the U.S.-Mexico border. Last Friday, President Barack Obama hosted his Mexican counterpart, President Enrique Peña Nieto, to underscore the good relations between the two countries. VOA’s Greg Flakus reports from Tucson.
    Video

    Video Film Helps Save Ethiopian Children Thought to be Cursed

    'Omo Child' looks at effort of African man to stop killings of ‘mingi’ children
    Video

    Video London’s Financial Crown at Risk as Rivals Eye Brexit Opportunities

    By most measures, London rivals New York as the only true global financial center. But Britain’s vote to leave the European Union – so-called ‘Brexit’ – means the city could lose its right to sell services tariff-free across the bloc, risking its position as Europe’s financial headquarters. Already some banks have said they may shift operations to the mainland. Henry Ridgwell reports from London.
    Video

    Video Recycling Lifeline for Lebanon’s Last Glassblowers

    In a small Lebanese coastal town, one family is preserving a craft that stretches back millennia. The art of glass blowing was developed by Phoenicians in the region, and the Khalifehs say they are the only ones keeping the skill alive in Lebanon. But despite teaming up with an eco-entrepreneur and receiving an unexpected boost from the country’s recent trash crisis the future remains uncertain. John Owens reports from Sarafand.
    Video

    Video Migrants Continue to Risk Lives Crossing US Border from Mexico

    In his speech Thursday before the Republican National Convention, the party’s presidential candidate, Donald Trump, reiterated his proposal to build a wall along the U.S.-Mexico border if elected. Polls show a large percentage of Americans support better control of the nation's southwestern border, but as VOA’s Greg Flakus reports from the border town of Nogales in the Mexican state of Sonora, the situation faced by people trying to cross the border is already daunting.

    Special Report

    Adrift The Invisible African Diaspora

    World Currencies

    EUR
    USD
    0.9017
    JPY
    USD
    104.72
    GBP
    USD
    0.7594
    CAD
    USD
    1.3160
    INR
    USD
    67.046

    Rates may not be current.