What the chaos looks like...

What the chaos looks like if Congress fails to raise debt ceiling by October

by Jeanne Sahadi

If Congress fails to increase the debt ceiling before October, the Treasury will struggle to pay nearly 25% of the country's bills for the month.

That's according to a new analysis by the Bipartisan Policy Center.

Treasury Secretary Steven Mnuchin would face a host of chaotic, legally questionable, and technically difficult decisions of who to pay on time and who to put off until lawmakers act.

The reason: Without an increase or suspension of the debt limit, Treasury would lack legal authority to resume borrowing. And because the government spends more than it takes in, it must borrow to make up the difference.

"Due to the unpredictability of cash flows," the bipartisan think tank said, "policymakers would need to act in advance of October if they intend to ensure that all obligations of the U.S. government are paid in full and on time."

Defaulting on any U.S. legal obligations is a treacherous prospect without real precedent. Markets likely would buck, and if the impasse isn't resolved quickly, the economy would suffer.

Absent action on the debt ceiling, the Bipartisan Policy Center calculates that Treasury would fall short by $80 billion in October, meaning it couldn't pay 23% of all its bills for that month.

"On a day-to-day basis, handling all payments for important and popular programs (e.g., Social Security, Medicare, Medicaid, defense, military active duty pay) would quickly become impossible," the report notes.

The choices facing Mnuchin would be unpalatable.

Say he was able to choose to pay what the government owes to bond holders, Social Security and Medicare recipients, the military, defense contractors and education programs for a total of $267 billion in October. He'd still be unable to pay IRS tax refunds, federal workers' salaries, veterans benefits, health and human services grants and a host of other bills coming due.

It doesn't -- and shouldn't -- have to come to that. Republican leaders keep promising that the debt ceiling will be raised in time. But their caucus can't agree on how to do so.

Among their disagreements is whether to pass a "clean" debt ceiling increase -- meaning no other measures are attached to the bill -- or tie any increase to spending cuts that many conservatives are calling for.

If they can't resolve their differences, House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell will have to lean on Democrats to get an increase or suspension of the debt ceiling across the finish line. And then, President Trump would need to agree to sign the bill.

On Thursday morning, Trump tweeted about the issue.

"I requested that Mitch M. & Paul R tie the Debt Ceiling legislation into the popular V.A. bill (which just passed) for easy approval. They didn't do it so now we have a big deal with Dems holding them up (as usual) on Debt Ceiling approval. Could have been so easy-now a mess!"

Despite the fracas, the expectation is still that lawmakers will avert default.

Nevertheless waiting until the very last minute has a cost. Past debt ceiling showdowns have raised the country's borrowing costs on U.S. bonds because investors don't reward brinksmanship.

And just this week, the credit ratings agency Fitch said this week it would review the United States' sterling AAA credit rating "if the debt limit is not raised in a timely manner prior to the so-called 'X date."