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Posted by Andrew Bartels on October 15, 2013
Two weeks after the Federal government shutdown and two days before the Federal government runs out of means to pay all its bills without additional Federal borrowing, the unthinkable development of a Federal debt default needs to be thought about. The responsibility for this situation lies squarely with the House Republicans, who have refused to bring to a vote a resolution to raise the debt ceiling without conditions. Moderate Senate Republicans and Senate Democrats have been working on a resolution that would raise the debt ceiling until January and re-open the Federal government at current, sequestration-reduced spending levels, in return for initiating negotiations between the White House, Democrats, and Republicans on longer-term deficit reduction plan and some minor adjustments to the Affordable Care Act. While this could well form the basis for a way out of this deadlock before midnight on Thursday, October 17, some House Republicans have already labeled it "a surrender" and vowed to oppose it. So, I think the risk of a Federal debt default is at 10% and rising.
The actual shape of a default is still unclear. Republicans have argued that the Treasury Department could avoid a default by paying interest on all Federal securities coming due out of existing incoming tax and other revenues, but in that case the Treasury would not be making payments to Social Security beneficiaries, recipients of Medicare-covered health treatment, and other US citizens. In addition to the political uproar about paying interest to the Chinese government, other foreign governments, and big banks that hold Federal securities, but not to US citizens who receive Social Security, Medicare, and other benefits, a failure to pay these benefit obligations would generally be seen by financial markets as a Federal government default, with all the resulting effects of such an action. The Treasury Department instead has said that it would pay obligations as they came in to the extend it had cash on hand to do so, and whenever the cash ran out it would not be able to pay any obligations in the queue at that point. So, it is highly probable that the Federal debt default would apply to both Federal debt securities and to Federal commitments to benefit program beneficiaries and to any entity that has sold goods and services to the Federal government.
For CIOs and other tech buyers, extreme caution and tech spending cutbacks are called for in the event of a default.
For tech vendors, the impact of a default would be significant.
Let us hope that an agreement is reached to raise the Federal debt ceiling before October 17 so we avoid these consequences. But even more, I hope that business and tech leaders will tell their Congressional representatives to stop using the debt ceiling as a negotiating tool. The damage to the US from even threatening a debt default, let alone allowing one to happen, is not worth any political gains that come this threat.
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