How is it government officials come to contradictory conclusions about what the U.S. Treasury can do in the event it lacks the money to pay all its bills? Can the Treasury prioritize and pay bondholders before everyone else?
The Treasury says no. The Government Accountability Office says yes. Who’s right?
Both, unfortunately. The Congressional Research Service explained the source of the controversy in a Sept. 19 report, “Reaching the Debt Limit: Background and Potential Effects on Government Operations.” Absent any specific statutory authority, the GAO concluded that a decision on prioritization is up to the Treasury, which says the same lack of legal authority prevents it from prioritizing payments. In other words, the disagreement is really over “two different interpretations of silence in statute,” according to the report.
If push comes to shove — if Congress fails to pass a short-term extension of the debt limit later this month — most policy analysts say the Treasury would side with the GAO’s interpretation.
“Even though Treasury says it has no authority to prioritize bondholders over others, we believe it most certainly will,” Andy Laperriere and Robert Perli of Cornerstone Macro LP wrote in an Oct. 7 research note.
And here’s Moody’s Investors Service: “We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact.”
Treasury Secretary Jack Lew surely can apply reverse reasoning: Not paying bondholders would mean a loss of creditworthiness, something no one in his position would precipitate voluntarily.
Does that mean the Treasury isn’t telling the truth about its options? Not exactly. Anyone who watched Lew on last Sunday’s talk shows understands that evading the question isn’t the same as lying.
And who can blame him? Why advertise the Treasury’s intention to pay bondholders first when it would mean AARP members, walkers and all, staked out on Pennsylvania Avenue with television crews in tow?