Wednesday, January 16, 2013

"I'll gladly pay you Tuesday" is default

Conservative lawyers David Rivkin and Lee Casey in the Wall Street Journal last week --

... a failure to raise the debt ceiling—to prevent new borrowing—does not and cannot put America's current creditors at risk. So long as this government exists, and barring a further constitutional amendment, those creditors must be paid....  If the executive chose to act irresponsibly and unconstitutionally and failed to make any debt payments when they come due, debt-holders would be able to go to the Court of Federal Claims and promptly obtain a money judgment. These basic facts should inform any credible decisions by credit-rating agencies in establishing the government's creditworthiness. Significantly, these agencies have traditionally acted favorably when heavily indebted countries have not defaulted on their debt but cut deeply their public spending. Second, despite White House claims that Congress must raise the debt ceiling to pay the bills it has incurred, the obligations protected as "debts" by the 14th Amendment do not include entitlement programs such as Medicare and Social Security. These programs are not part of the "public debt," which consist of loans that are made to the federal government through bonds and similar financial instruments ... Congress can reduce a wide range of payments to various beneficiaries at any time by amending the statutes that authorize them or simply by failing to appropriate sufficient funds to pay for them.

In other words, as long as the USA keeps servicing the public debt, which they claim it has to because of the 14th Amendment, it can't be downgraded.

OK, now to an actual credit rating agency, Fitch --

With no legal authorisation for net debt issuance, the Treasury would be forced to immediately eliminate the deficit - a fiscal contraction twice as great as the recently avoided 'fiscal cliff' - by delaying payments on commitments as they fall due. It is not assured that the Treasury would or legally could prioritise debt service over its myriad of other obligations, including social security payments, tax rebates and payments to contractors and employees. Arrears on such obligations would not constitute a default event from a sovereign rating perspective but very likely prompt a downgrade even as debt obligations continued to be met.