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Regulatory: Thinking About the Unthinkable—Partial Default

A government default would result in significant global consequences.

On May 16, the federal government reached its statutory debt ceiling of $14.29 trillion. Treasury cannot borrow more until Congress provides new authority. Congressional Republicans are demanding substantial reductions in spending, without new taxes, in return for raising the debt ceiling. The two political parties have joined an enormous game of chicken—the hardest part will be knowing when to pull out. A mistake could have devastating effects on the country’s single greatest asset: the willingness of others to do business in our money.

The plan for managing a debt-ceiling crisis was written by President Reagan and employed by President Clinton. The government can avoid default for several weeks through a series of one-time-only cash management tricks to defer payments and accelerate receipts. For example, Treasury has announced it will not make deposits into federal employee pension funds. It also can slow the payments of other obligations, such as tax refunds and contractor invoices, while offering debtors discounts for faster repayments. 

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John Cooney

John F. Cooney is a partner in the Washington, D.C., office of Venable.

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