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Thursday, July 28, 2011

Treasury planning on paying bondholders first if debt ceiling isn't raised

From Bloomberg:
The U.S. Treasury will give priority to making interest payments to holders of government bonds when due if lawmakers fail to reach an agreement to raise the debt ceiling, according to an administration official.

The official requested anonymity because no announcement has been made. The Treasury has said about $90 billion in debt matures on Aug. 4 and more than $30 billion in interest comes due Aug. 15. Overall, more than $500 billion matures in August.
An analogy: this would be like if you skipped paying rent so you could pay your credit cards. Sure, you might get kicked out, but at least your credit rating won't get royally screwed.

This makes sense to me: the Treasury can't keep this from happening, but they'll at least be able to borrow money in the future at low rates. This should prevent a default with the creditors, but it will mean that some pretty hefty cuts will have to be made in government spending, and somebody's going to turn out royally pissed, whether it's Social Security beneficiaries, members of the military, or researchers expecting grant money to work on experiments.

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