Republicans ready for debt-ceiling battle

2013-01-16 16:49
(Picture:  AP)

(Picture: AP)

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Washington - Republican lawmakers are preparing to introduce legislation to direct the US Treasury to make interest payments on American bonds first and then prioritise other government outlays in case Congress does not raise the debt ceiling.

Supporters of the idea see it as a politically palatable alternative to default, which could rattle markets as occurred in the summer of 2011.

The likelihood of another market-unsettling event is challenging Republicans to find another idea as they use the debt ceiling as leverage to extract spending cuts from President Barack Obama.

But critics, including some Republicans, say prioritising payments is largely unworkable and would not fool the markets.

The Treasury hit the $16.4tn debt ceiling, or the legal amount it is allowed to borrow, on New Year's Eve and started moving funds around so that the government can continue paying its bills.

But the department said it will run out of funds as early as mid-February.

Among those advocating the approach is Republican Senator Pat Toomey of Pennsylvania, who is expected to reintroduce legislation next week to instruct the Treasury to make sure bond-holders, got paid first if Congress does not raise the debt ceiling by the deadline.

In the House of Representatives, Arizona Republican David Schweikert introduced legislation that would force the Treasury to prioritize payments to bond-holders, Social Security recipients and military salaries.

"No one is talking about default except for the president," said Patrick Tiberi, a Republican Representative from Ohio who heads a tax-writing subcommittee.

"He doesn't need to default because he has enough revenue, money coming in from the taxes that you guys pay to pay bills," Tiberi told reporters on Tuesday.

"Ninety-nine percent of my constituents would say that sending out Social Security payments and keeping veteran hospitals open is a bigger priority than national parks," he said.

But former advisers to Republican President George W Bush say the idea is unworkable for a number of reasons, including the fact that tax revenue does not come in at the same rate that payments are due.

"Prioritisation is impossible," said Tony Fratto, who was Deputy Press Secretary for Bush and a spokesperson on economic policy who fought through approximately seven debt limit increases with Congress.

"Is the government really going to be in the position of withholding benefits, salaries, rent and contract payments, in order to pay off Treasury bond-holders? That would be a political catastrophe," Fratto said.

Increased credit risk

Keith Hennessey, Bush's National Economic Council director, said prioritisation was a bad idea that could increase credit risk and said it would be irresponsible.

"Payment prioritisation doesn't stop payments, it just delays them. Then the aggrieved party sues the government, and probably wins, and it turns into a bloody mess," Hennessey, now an economist at Stanford, said in a blog post this week.

Even when the government was operating under a budget surplus, as it did from 1998 through 2001 under President Bill Clinton, the Treasury still had to borrow or issue debt to make its regular payments because its income fluctuates month-to-month.

The department is expected to run out of ways to stave off a default as early as mid-February, and Republican lawmakers say they will refuse to give the Obama administration the votes needed to raise the debt cap unless Democrats agree to spending cuts and changes to federal benefits programs

On 15 February, the government is expected to take in about $9bn in revenues and is required to pay bills amounting to $52bn, according to the think tank the Bipartisan Policy Centre, which analysed Treasury's cash flows.

The Treasury Department has said ensuring that bond investors got paid before others would be a "default by another name."

And in the past, Treasury officials have said the department lacks the formal legal authority to establish priorities to pay obligations, according to the non-partisan Congressional Research Service.

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