Debt Default 101: What Happens on Oct. 17? (Or Not)
1. What is the Oct. 17 "debt ceiling deadline" and why does it matter?
By the end of the day Oct. 17, the U.S. Treasury will max out its ability to borrow money and be left only with the cash on hand to pay bills going forward.
The Treasury estimates it will have just $30 billion in cash reserves as of Oct. 18, plus any daily cash inflows (tax revenue) thereafter. Bottom line: this would be uncharted and unpredictable territory for the U.S. government. We have never before operated without the ability to borrow more money .
2. When will the U.S. go into default?
The short answer: sometime after Oct. 17 and likely before the end of the month. But default will NOT happen when the clock strikes midnight on Oct. 18.
We do not know the precise day or time when the U.S. will be unable to pay all its bills in full and on time. The nonpartisan Congressional Budget Office estimates a technical default would occur between Oct. 22 and Nov. 1. The independent Bipartisan Policy Center projects default could hit between Oct. 18 and Nov. 5.
There is no official estimate for a date or time of actual default.
3. Why don't we know an exact date for default?
Treasury officials and independent economists say it's impossible to know how quickly the government's cash on hand will disappear after Oct. 17.
Daily inflows of tax revenue are notoriously "variable and irregular," as are changes in expenditure flows under sequestration and the behavior of investors in Treasury securities. No one can predict precisely how much cash will come in on any given day.
4. What happens if there's no deal after Oct. 17?
If there's no deal, the Treasury Department will be unable to issue any new debt on Oct. 18. That means the nation's credit card is maxed out and all we're left with is the money in our checking account.
Former Treasury chief of staff Mark Patterson likens it to "driving with your car on empty about to go into the desert and passing the last gas station intentionally and saying, 'I will take my chances and maybe there will be another gas station on down the road in the desert.'"
"You might be able to go farther, and you just might because cash does come in over the transom at Treasury," Patterson told MSNBC recently, "but you just don't know how far you can make it."
The government will continue to sell T-bills in the marketplace, essentially "rolling over" (or re-issuing) existing debt that has matured. But the open question is whether investors will choose to reinvest and/or demand higher prices. Those dynamics could expedite a cash shortfall.
Bottom line: default would be imminent and unpredictable. Meanwhile, U.S. and global markets could get spooked; rating agencies could downgrade U.S. credit.
5. What are the biggest bills coming due after Oct. 17?
After Oct. 17, the U.S. has several major scheduled payouts. Without an increase in borrowing authority, the Treasury will have to rely solely on available cash to pay them. At any one of these junctures, or sooner, we could hit default:
Oct. 23 - $12 billion in Social Security benefits
Oct. 31 - $6 billion in interest on Treasury securities
Nov. 1 - $58 billion in Social Security benefits; Medicare reimbursements; military pay/government pensions
6. If the cash runs out, who gets left empty-handed?
On the day a default is upon us, the Obama administration will have to choose, or "prioritize," how to pay the bills with the cash it has on hand. It's widely assumed the U.S. would pay creditors first, since those payments are made on a separate computer system. That would leave some beneficiaries, such as Social Security recipients, at risk of not seeing their checks.
However, Treasury could also decide not to pick-and-choose whom to pay and simply wait until it has the cash available to make an entire day's assigned payment all at once, albeit at a later date.
Sources: U.S. Treasury Department; Congressional Budget Office; Bipartisan Policy Center