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What happens if the U.S. defaults?
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CBC News-How a default would unfold immediately appears relatively straightforward. It's the reaction that no one can predict, because it's never happened before.
The first move will be made by the U.S. Federal Reserve. The Fed is the Treasury Department's bank, handling government cheques and lending to banks which borrow using U.S. Treasury debt as collateral.
One day — the U.S. government has estimated it will be Aug. 2 — the Fed will serve notice on the government that its account at the Fed will be in overdraft by the end of the day, in violation of the Federal Reserve Act.
On Aug. 3, some $23 billion in Social Security benefit payments are due to be processed.
On Aug. 4, the Treasury Department must pay $87 billion to investors to redeem maturing Treasury securities.
On Aug. 15, more than $30 billion in interest payments come due.
In addition to those costs, the government normally pays $5 billion to $10 billion daily to defence contractors, Medicare providers, federal employees and others.
With no authority from Congress to borrow more, the government won't be able to make all its usual payments.
Some suggest the government could pay some of its bills and defer other spending, but given it makes more than 70 million payments a month, that selective payment would be a formidable task.
Regardless of how that issue is resolved, there's no question that government services, programs and benefits could take an enormous hit.
No one knows exactly what spending choices U.S. president Barack Obama and his top officials would make if the crisis comes.
The White House Office of Budget and Management is the agency charged with reviewing possible cuts in benefits and payments while the Treasury Department handles cash flow.
All have been mum about their crisis plans, apparently to avoid market speculation or panic.
One analysis, by the Bipartisan Policy Center, suggested that once the government runs out of cash and lacks the power to further borrow, it would need to slash spending at once by as much as a whopping 44 per cent. The U.S. now borrows more than 40 cents for every dollar it spends.
Parks and monuments could be temporarily shut. Clinical trials on new drugs or other scientific research projects as well as half-finished highway construction projects would be put on hold.
The fear is that an extended period in default would throw the already weak U.S. economy back into recession as social services and pension cheques don't go out, civil servants don't get paid and companies that rely on U.S. government contracts and services see their revenues fall.
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