US debt ceiling deal between Biden and McCarthy
Although the White House and House Republicans have reached a tentative agreement to raise the debt ceiling, the saga isn't over yet. Congress still needs to pass the deal – far from a guaranteed outcome – and President Joe Biden would need to sign it before the US defaults or misses a scheduled payment.
If lawmakers fail to pass the tentative agreement, and don’t raise the country’s debt limit by early June, the government may confront an unprecedented challenge: determining which bills to prioritize for payment as the Treasury Department grapples with insufficient funds.
Debt vs. other payments
If the US doesn’t raise the debt ceiling in time, the Treasury may have to decide whether to make interest payments to its debtholders or to pay its non-debt obligations, such as Social Security, veterans’ benefits, unemployment insurance, food stamps and running government organizations such as the military and the US Centers for Disease Control and Prevention.
A US default on its debt would undermine faith in the federal government’s ability to pay all its bills on time, affecting the government’s credit rating and unleashing massive turbulence in financial markets.
If America’s credit rating were downgraded, that could raise borrowing costs for millions of Americans, sending mortgage, personal loan and credit card rates higher. It could make business’ borrowing costs rise and lead to layoffs – and ultimately a recession.
Treasury will not be able to make everyone happy
Though prioritizing debt payments might stave off an even-greater economic collapse, the US may not emerge unscathed.
In 2011, Treasury Secretary Tim Geithner compared the government picking and choosing which bills to pay to homeowners who pay their mortgage while pushing off their car loan and credit card bills: While that key housing expense is taken care of, the person would likely still have damaged credit.
Betsey Stevenson, a professor of economics and public policy at the University of Michigan, said that no matter which payments Treasury decides to put first, the agency will likely be sued by those left behind.
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Source: CNN
