Wall St. Is Counting on a Debt Limit Trick That Could Entail Trouble

“This so-called prioritization scheme makes Republicans’ priorities pretty clear — crystal clear, if I may add,” Karine Jean-Pierre, the White House press secretary, said on Jan. 17. “They want to put wealthy bondholders over ordinary Americans who want safe food, safe skies, safe communities and secure borders.”

Attempting to prioritize payments would carry severe political, practical and legal risks. Paying back bondholders might be critical to protecting the bedrock of financial markets, but it would put the administration in the position of looking like it was supporting wealthy investors over retirees, disability beneficiaries and military personnel.

It could also be subject to legal challenges, given that the executive branch would be deciding which congressional spending decisions to ignore and which ones to carry out. That could call into question “the balance of power between Congress and the president over spending priorities and the potential for use of prioritization in ways that Congress might not intend,” according to a Congressional Research Service analysis published in 2015.

And it might not even work. In 2011, officials had made rough plans for a very straightforward version of prioritization. But the Treasury worried about its ability to prioritize payments within its own systems if it needed to cherry-pick between a range of obligations, rather than just repaying interest and principal on debt while delaying everything else. Fed staff members thought the department could figure it out given time, based on transcripts from that August.

But “it’s something that until you have developed the procedures and tested the procedures, your comfort level is pretty low,” said Louise Roseman, a former Fed staff member who was working with Treasury on contingency planning. The Fed serves as the government’s banker, so it would have helped carry out the prioritized payments.

Even after contingency planning in the 2013 showdown, a top Treasury official called prioritization “entirely experimental” and said it carried “unacceptable risk.” 

It also remains unclear whether prioritization would avert a financial meltdown. Markets may still balk in response to any breach of the debt limit that meant the United States could not make good on its obligations, whether it was an official bond default or not.

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