White House: Debt prioritization would trigger legal battles

Reuters

WASHINGTON, Oct 11 (Reuters) - The Obama administrationwarned on Friday that if Congress doesn't raise a cap ongovernment borrowing, efforts to forestall a debt default couldtrigger huge legal battles that would still damage America'screditworthiness.

Many analysts presume the administration would at least tryto prioritize payments to creditors if government coffers run solow later this month that the Treasury is unable to cover allits obligations. Missing non-debt obligations could cause arecession, while missing debt payments is seen as a possiblepath into an even more damaging financial crisis.

The White House has said it opposes prioritization, whileTreasury Secretary Jack Lew said on Thursday the government'spayment systems would strain so much in the effort that it wouldprovoke "chaos."

Gene Sperling, a senior advisor to the president, saidprioritization would carry other risks as well.

"Even if it was technically possible, which is still veryunclear, (it) would be economically horrible for tens ofmillions of people," he told a finance conference. "There wouldbe extraordinary litigation, massive litigation challenging oursystem, challenging each payment."

"All of this would put a serious cloud over what has alwaysbeen the impeccable credit of the United States government," hesaid.

The Treasury expects to the government will hit its $16.7trillion cap on borrowing by Oct. 17 and would then have about$30 billion in cash as well as incoming revenue to cover itsbills. Because Washington takes in only about 70 cents for everydollar it spends, the government could begin defaulting on itsobligations soon after hitting the debt ceiling. AmongWashington's many obligations, the government is scheduled tomake debt payments on the 17th, 24th and 31st of this month.

Sperling also tried to cast doubt on the notion that Obamacould invoke the 14th Amendment of the U.S. Constitution, whichsome scholars read as prohibiting any sort of default. Underthis scenario, Obama would simply order Treasury to continueborrowing even if Congress didn't raise the debt ceiling. TheWhite House has so far rejected this possibility.

"Let's be clear. Section 4 of the 14th Amendment does notgive the president of the United States the unilateral authorityto borrow," Sperling said.

He said even if Obama tried this strategy, it would invitelegal challenges that could roil financial markets.

"That  could create the kind of uncertainty and doubt inTreasury bills and our auctions that would in many waysreplicate the harm that would take place from a technicaldefault."

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