Treasury Secretary Janet Yellen has warned that a default on U.S. debt obligations could spark a “global financial crisis,” but some experts aren’t so sure it would come down to that. According to Politico, some analysts on Wall Street think the Treasury will be able to continue to make its bond payments if the debt ceiling is breached, simply by holding back a range of payments from individuals and businesses.
In essence, the analysts are embracing a plan being discussed in Republican circles that would empower the Treasury to prioritize payments once the debt ceiling is breached.
“Most investors who follow this closely are very aware the United States will not default on its bonds,” Ajay Rajadhyaksha, global chair of research at Barclays, told Politico.
Bob Elliott, CEO of investment firm Unlimited Funds, said that the Treasury has the tools it needs to avoid causing economic chaos. “We would expect them to use those tools to ensure that the U.S. doesn’t experience a default,” he added.
Some analysts would like to hear more details from the Treasury on what it plans to do. “They need to tell everybody what the real deal is with the Treasury market and whether or not this is a true massive threat or if it’s actually completely benign, which I think it is,” Bank of America rates strategist Ralph Axel said.
Not so fast? Biden administration officials have pushed back against the notion that the Treasury can prioritize payments, saying that there are both legal and political issues that could make doing so difficult if not impossible.
“The notion is intellectually bankrupt,” former Treasury Secretary Jack Lew told Politico.
Lew said that the Treasury ran some exercises during the Obama administration and determined that prioritization might work in theory. However, “It’s never been tested in the real world. We don’t know what the cash flows required are. We don’t know how that would interact with other systems being on or off.” In the end, prioritization amounts to “accepting default,” Lew said – a position that Yellen also takes.
And not everyone on Wall Street agrees that the problem is overblown. Bond giant PIMCO recently warned against testing the limits. “We take Secretary Yellen and previous Treasury secretaries – both Republican and Democratic – at their word that prioritizing payments under Treasury’s existing systems is simply not viable and should not be viewed as a feasible alternative to Congress raising the debt ceiling,” PIMCO’s head of public policy said in a statement.