Treasury: No Check Is Guaranteed

Washington — Treasury Secretary Jack Lew plans to warn lawmakers today that he will be unable to guarantee payments to any group — whether Social Security recipients or U.S. bondholders — unless Congress approves an increase in the federal debt limit.

With Washington in gridlock and a key deadline in the debt-limit debate just one week off, Lew plans to tell a Senate panel that he would do all he can to minimize the pain of breaching the $16.7 trillion debt limit, according to Treasury officials briefed on the testimony. But in an unprecedented situation in which he would be relying entirely on the erratic flow of incoming revenues, Lew will note that there is no certainty the government could make interest payments — and that the broader economy would suffer.

“When you get into this completely unprecedented world, it’s impossible to predict how things could and would play out,” a Treasury official said. A second Treasury official said President Obama would have to make the final decision on what choices to make.

Lew’s appearance will be the first public confrontation between a senior administration official and Republicans since the fiscal showdown began last month. The meeting comes as some lawmakers on Capitol Hill are questioning whether the administration has been too alarmist about the threat of going past an Oct. 17 deadline to raise the debt ceiling. Republicans have cited reports by credit rating firms that say that the United States would not technically default unless it fails to make interest payments on its debt — which they regard as unlikely.

Echoing points made by Republican presidents and officials in prior administrations, Lew is likely to counter that argument by highlighting the broad risks of leaving the government with no borrowing authority, the officials say. While he would say that Treasury understands the importance of making interest payments on the debt, a combination of factors — including the government shutdown and the sheer complexity of federal payments — would leave too much room for an economy-shaking mistake.

Furthermore, officials say, Lew is likely to point out that the Treasury routinely refinances about $100 billion in debt every week, paying back principal and taking on new debt. He will note that should investors back away from Treasury debt, it could make refinancing difficult and throw the country’s financial markets into even greater chaos, the officials say.

Lew is also likely to insist that the administration will face a series of difficult decisions even if Treasury can avoid what the credit rating firms consider a default. In a scenario where federal spending will far exceed revenues, he is planning to say the administration would have only imperfect options in deciding who to pay. Officials say he will push Republicans to decide who they wouldn’t pay — Social Security recipients or veterans.

“These are terrible, terrible choices,” the Treasury official said. The officials spoke on condition of anonymity to discuss Lew’s remarks before the hearing.