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Higher mortgage rates, lower social security payments: The calamity Washington wants to avoid with a debt ceiling deal


By Samantha Delouya, CNN

New York (CNN) — At long last, the White House and House Republicans have reached a tentative agreement to raise the debt ceiling. But a deal isn’t over yet: Congress still needs to vote on the deal – far from a guaranteed outcome – and President Joe Biden would need to sign it before the US defaults or misses a scheduled payment.

Every day that passes without a bill to raise the debt ceiling, the probability of the United States reaching the critical date that it can no longer meet its financial obligations steadily grows.

If lawmakers fail to pass the tentative agreement, and they don’t raise the country’s debt limit by early June, the government may confront an unprecedented challenge: determining which bills to prioritize for payment as the Treasury Department grapples with insufficient funds.

Debt vs. other payments

If the United States doesn’t raise the debt ceiling in time, the Treasury may have to decide whether to make interest payments to its debtholders or to pay its non-debt obligations, such as Social Security, veterans’ benefits, unemployment insurance, food stamps, and running government organizations like the military and the US Centers for Disease Control.

The United States government makes millions of payments each day, but the overall economy would pay a far greater price if it were to miss payments on its debt, according to Mark Zandi, the chief economist at Moody’s Analytics. Moody’s Analytics is separate from Moody’s Investor Service, the credit rating agency.

If the United States defaults on its debt, it would undermine faith in the federal government’s ability to pay all its bills on time, affecting the government’s credit rating and unleashing massive turbulence in financial markets.

Countries with lower credit ratings face higher interest rate costs than those that are viewed as more trustworthy borrowers. The three largest credit rating agencies – Moody’s Investor Service, S&P Global Ratings, and Fitch Ratings – rate borrowers based on their perceived ability to pay back debt.

If America’s credit rating were downgraded, that could raise borrowing costs for millions of Americans, sending mortgage, personal loan and credit card rates higher. It could make business’ borrowing costs rise and lead to layoffs – and ultimately a recession.

What gets prioritized?

Absent a bill passed by Congress and signed by Biden, Treasury will likely do everything in its power to avoid a debt default.

In contrast to debt payments, government payments like Social Security or federal worker salaries aren’t considered debt instruments, so they are less likely to come into play when the agencies rate the United States’ debt.

Zandi acknowledged that a government decision to pay back bondholders, including foreign governments like China and Japan, over an elderly Social Security recipient will likely be politically unpopular. However, he believes the government would try to prevent a debt default for as long as it can.

“The reality is, if they don’t do that, then the economy is going to evaporate, the budget deficits are going to explode, and our interest expense is going to rise because investors are going to demand higher rates,” Zandi said.

“A grandmother 10 to 20 years from now looking for a Social Security check will be much less likely to get one. At least not one as large because we’ll be in a much more precarious financial situation.”

Treasury Secretary Janet Yellen, however, has not said what the Treasury Department would do if the country hits the so-called X-date, when the government can no longer meet all its obligations. In March, she called prioritizing payments “effectively a default by just another name.”

Treasury will not be able to make everyone happy

On Friday, Yellen updated her estimate of the X-date, to June 5.

Though prioritizing debt payments might stave off an even-greater economic collapse, the United States may not emerge unscathed.

In 2011, then-Treasury Secretary Tim Geithner compared the government picking and choosing which bills to pay to a homeowner who pays their mortgage while pushing off their car loan and credit card bills: while that key housing expense is taken care of, that person would likely still have damaged credit.

Betsey Stevenson, a professor of economics and public policy at the University of Michigan, said no matter which payments Treasury decides to put first, the agency will likely be sued by those left behind.

“What should Treasury do? Should it issue new debt it’s not authorized to issue? Should it fail to pay a bill it’s required to pay? Should it fail to honor the debt that the US government has issued? There is no clear legal answer,” she said.

“Treasury doesn’t really want to answer that question, and they don’t really want to be in that position.”

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Article Topic Follows: CNN - Business/Consumer

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