US weighs pay priorities if default comes

Associated Press

WASHINGTON

If the government can’t pay all its bills come Wednesday, odds are it will pay bondholders. Social Security and Medicare recipients will be high on the must-pay list, too. Likely losers: federal workers in jobs deemed non- essential, private contractors and state and local governments.

It seems politically certain that active-duty members of the military would be paid, but there are no guarantees as the government decides which of its 80 million monthly payments to make and which to set aside.

Since the U.S. now borrows slightly more than 40 cents for every dollar it spends, a failure by Congress to increase the debt ceiling above the $14.3 trillion limit suggests the government could renege on more than 40 percent of its current obligations.

Just five days before the Treasury begins running out of cash to pay all its bills, Congress remained deadlocked over plans to both raise the debt limit and trim federal spending. President Barack Obama warned anew that the credit status and financial credibility of the United States stand in severe jeopardy.

“There are plenty of ways out of this mess, but we are almost out of time,” Obama said, noting the Tuesday deadline.

Treasury, working with the White House budget office, has sketched out a priority plan for payments. So far, officials have refused to provide details, knowing it could touch off a firestorm. They’re hoping for a compromise soon so it won’t be necessary. But White House spokesman Jay Carney said Treasury would release some details on payment priorities as the Tuesday deadline approached, perhaps over the weekend.

There is wide agreement that the government would take pains to avoid an actual default on its debt by putting interest payments to bondholders at the top of the payment priority list.

“Most people in the bond market feel the bonds will be paid off, that they will get priority in payment” said David Wyss, former chief economist at Standard & Poor’s. “This is not like when you shut down the government. You can still spend money up to the amount of revenue you’re bringing in. You just can’t borrow.”

Of today’s $14.3 trillion national debt — the accumulation of decades of deficit spending — some $9.7 trillion is financed through the sale of Treasury bonds, bills and notes to the public. Holders of these securities range from individuals to pension funds, corporations and foreign governments.