Markets Worry Trump May Have to Use Obama’s Secret Debt Ceiling Plan
Obama in 2011 prepared contingency to prioritize repayments
Prioritization a ‘dangerous precedent,’ Citigroup says
By Saleha Mohsin and Liz McCormick, Bloomberg
July 14, 2017
Deep within the Treasury Department sits a once-secret plan written by the Obama administration that could lead to the first-ever default on U.S. debt. Bond traders are worried that Donald Trump’s Treasury secretary may have to use it.
The U.S. government will reach its statutory limit on borrowing some time in October, the Congressional Budget Office estimates. The Trump administration has asked Congress to raise the ceiling before then, but it is running into the same complications the Obama White House encountered: lawmakers, mostly Republicans, who want to use the debt limit as leverage for controversial policy changes.
Treasury Secretary Steven Mnuchin has said there are “plans and backup plans” to keep the government solvent through September. Bond traders suspect he is referring to preparations made in 2011 in case the Obama administration had to prioritize payments on government securities over other obligations. The Treasury chief got fresh hope that Congress may raise the debt limit before leaving for its August recess after Senate Majority Leader Mitch McConnell delayed the break by two weeks.
When the nation almost breached its debt ceiling six years ago, the Federal Reserve and Treasury drew up contingency plans that were kept secret until January, after transcripts of an Aug. 1, 2011 conference call at the central bank were released following a customary five-year lag.
One day before protracted negotiations concluded with Congress raising the debt ceiling, Fed officials were briefed about how its staff and Treasury officials had worked together to develop a plan to handle debt payments in the event they had to be “prioritized or at least not fully paid,” the transcripts say.
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