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Nation/World

October 9, 2013

Q&A: Why breaking debt limit sparks fear

(Continued)

Q. What happens after Oct. 17?

A. The government could pay all its bills for a few days, according to the nonpartisan Congressional Budget Office. But sometime between Oct. 22 and Oct. 31, the $30 billion would run out. The date isn’t exact because it’s impossible to foresee precisely how much revenue the government will receive and when.

Q. When it runs out of cash, does the government default?

A. No, not right away. A default would occur if the government fails to make a principal or interest payment on any of its Treasurys. A $6 billion interest payment is due Oct. 31.

Many experts think that to avoid a default, Treasury would make payments on the debt its top priority. The House has approved a bill to require such “prioritization.” The Senate hasn’t passed it, though. And President Barack Obama has threatened to veto it.

In any case, making some payments and not others is harder than it might sound. Treasury makes roughly 100 million payments a month. Nearly all are automated. Without any cash in reserve, a minor glitch could cause Treasury to miss a debt payment — and default.

“Treasury would do everything in their power to not miss a debt payment,” says Donald Marron, an economist at the Urban Institute and a former economic adviser to President George W. Bush. “But when you’re in untested waters under a great deal of stress, bad things happen.”

Even if the government managed to stay current on its debts, it would fall behind on other bills. These include Social Security benefits, federal employees’ pay and payments to contractors.

There are legal and political obstacles, too. The government is legally obligated to pay contractors. If not, they could sue for non-payment. And how long would members of Congress stand by as bondholders in China and Japan were paid interest, while Social Security and veterans’ benefits were delayed?

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