If Republicans are serious about voting against raising the debt ceiling unless they get serious concessions on spending, they should realize that the government doesn’t necessarily face default if the the ceiling isn’t raised.
Former Congressional Budget Office acting director Donald Marron lays out some of the alternatives to default that Treasury secretary Tim Geithner could pursue in the case that the administration loses a game of chicken on the debt ceiling issue. Marron writes that in the case that the government approached the debt limit, Geithner would use “the same tactics as any stressed debtor”:
Squirrel it away: First, Geithner would hold on to his cash and what little credit he has left. Among other things, he would eliminate unneeded borrowing associated with certain obscure programs such as the Exchange Stabilization Fund and a state and local debt program.
Turn to family for help: He would call in money from his relatives, in this case the Federal Reserve. During the financial crisis, Treasury created a special program to borrow money on the Fed’s behalf; that borrowing now totals $200 billion. Treasury temporarily wound this program down the last time we got close to the debt ceiling. Expect the same this time.
Promise to pay later:He would issue IOUs (which don’t officially count as debt) to friendly creditors who have no choice but to accept them. Geithner’s predecessors did this with two retirement funds for government employees, both of which were later made whole. In his recent letter to Congress, Geithner said he’d do the same.
Sell stuff: Lastly, Geithner would look for assets that are easy to sell. Thanks to the financial crisis, Treasury now owns a sizeable investment portfolio, including stakes in auto companies, banks and other financial institutions. Don’t be surprised if Treasury cashes in some of these positions to raise cash in coming months.
Those fixes, Marron thinks, would buy the Treasury enough time to negotiate a ceiling increase. But even in the case that all those options were exhausted before a compromise was reached, Geithner could still avoid default by choosing “which creditors to pay promptly and which to defer.” Those that would probably have to wait in line, Marron thinks, are “Social Security beneficiaries, Medicare providers, military personnel, weapons vendors or taxpayers expecting refunds.”
That Geithner has these fall-back options is not widely understood. The GOP almost certainly won’t withhold the support needed to increase the debt ceiling before these measures become necessary, but if they think they can extract major concessions from the administration by signalling an unwillingness to compromise they should be well aware of the tools Geithner has at his disposal.