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October 14, 2013

Q&A: What happens if US breaks borrowing limit?

(Continued)

WASHINGTON —

Q. When it runs out of cash, does the government default?

A. No, not right away. A default would occur if the government fails to make a principal or interest payment on any of its Treasurys. The first interest payment after Thursday's deadline is a $6 billion payment due Oct. 31.

Many experts think that to avoid a default, Treasury would make payments on the debt its top priority.

"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," says Moody's Investors Service, a credit rating agency.

But that is the subject of intense dispute in Washington. The House has approved a bill to require such "prioritization." The Senate hasn't passed it, though. And President Barack Obama has threatened to veto it.

Without an increase in the borrowing limit, the government couldn't pay other obligations on time, such as Social Security benefits, bills from government contractors and Medicare reimbursements. Those payments are also legal obligations, Lew argues, and failure to pay them would essentially be equivalent to a default.

In any case, making some payments and not others is harder than it might sound. Treasury makes roughly 100 million payments a month. Nearly all are automated. Lew says the Treasury's computer systems aren't equipped to choose some and not others among all those outgoing checks.

And without cash in reserve, any minor glitch could cause Treasury to miss a debt payment — and default.

"Treasury would do everything in their power to not miss a debt payment," says Donald Marron, an economist at the Urban Institute and a former economic adviser to President George W. Bush. "But when you're in untested waters under a great deal of stress, bad things happen."

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