By Kate Davidson
Federal Reserve and Treasury Department officials in August 2011
had privately formalized a plan to make on-time payments on
Treasury debt and delay paying other government bills if Congress
and the White House failed to reach an agreement to raise the
federal borrowing limit, according to transcripts of a central bank
meeting released Thursday.
The transcripts provide the most detailed description yet from
any government agency of what officials were prepared to do in the
event of a debt-limit breach.
At the time, Obama administration officials were warning the
Treasury would run out of cash to pay all the government's bills if
Congress failed to lift the debt ceiling.
Republicans were pressing the Treasury to prioritize payments to
bondholders to avoid a default on U.S. government securities, a
linchpin of global markets. But Treasury officials said
prioritizing principal and interest payments while missing payments
on other obligations -- such as Social Security checks, veteran
benefits and other vendor bills -- was "simply default by another
name," and thus an "unacceptable outcome."
The issue was of great concern then to investors around the
world, and could be again this year as Congress faces another debt
ceiling deadline on March 15.
The prospect that the U.S. government might fail to make bond
payments had roiled financial markets when Fed officials held an
emergency conference call on Aug. 1, 2011, just after congressional
leaders announced a deal to raise the debt limit.
Transcripts from the call show the Fed -- acting as the
Treasury's fiscal agent and at its direction -- was prepared to
keep making principal and interest payments on time, and delay
other payments as necessary, if the deal fell through and the debt
limit wasn't raised in time.
Louise Roseman, the director of the Fed's division of reserve
bank operations and payment systems at the time, told Fed officials
that the central bank, its regional reserve banks and the Treasury
had jointly developed and codified the procedures into a "special
operating circular, " which it planned to issue to banks if
Congress failed to strike a timely agreement. The plan was
"approved by the Treasury as reflecting what it would like the
Reserve Banks to do as its fiscal agents if it ever came to that,"
she said.
The Fed released the transcripts from its 2011 meetings on
Thursday under its customary five-year lag.
Ms. Roseman said the Treasury planned to ensure it would be able
to make the interest payments "by holding back other government
payments and accumulating sufficient cash balances in its Fed
account to pay upcoming coupon payments."
"The implication of this approach would be that the Treasury
would be delaying non-[principal and interest] payments even on
days when it may have ample balances in its Fed account to have
been able to make those payments if it had so chosen," she said.
"Instead, the Treasury would be conserving that cash to be able to
ensure that it would be able to pay future-dated interest
payments."
Ms. Roseman said the Treasury wouldn't submit any payments to
the Fed's regional reserve banks unless it was sure it would have
sufficient balances to settle the transactions on the settlement
dates.
The release of the transcripts could complicate efforts to
negotiate the next debt-limit increase ahead of the March 15
deadline. Congressional Republicans had repeatedly called on the
Treasury to prioritize payments ahead of the 2011 deadline, as well
as other categories of federal spending.
In the years since the showdown, administration officials have
acknowledged that they conferred with the New York Fed and
determined that prioritizing such payments was technologically
possible. But they warned such a move "would be entirely
experimental and create unacceptable risk to both domestic and
global financial markets."
Treasury officials told government watchdogs that they
determined the "least harmful option" available in 2011 was to
delay all payments until they could all be made on a day-by-day
basis.
According to the inspector general's report, the Treasury said
that, because Congress has never provided guidance on how to
prioritize payments, its systems are designed to make each payment
in the order it comes due.
"Treasury officials determined that there is no fair or sensible
way to pick and choose among the many bills that come due every
day," the report said.
The Fed transcripts released Thursday suggest that, at the end
of the day, officials were prepared to prioritize principal and
interest payments on bonds, though Ms. Roseman acknowledged the
plans were fluid and had only been finalized the prior Friday, July
29.
Contingency planning for such a default "had been under way for
months," she said, but the plan had changed substantially over the
previous week or two, in part because "it was only recently that
senior policymakers, here at the board and at the Treasury and
elsewhere, paid very serious attention to what the procedures would
be, and questioned, perhaps, whether that was the appropriate
approach."
She said the plan she was outlining would "provide a higher
degree of certainty" to payment recipients.
Then-Fed Chairman Ben Bernanke asked whether the Fed would have
been able to prioritize payments for other major categories of
federal spending, in addition to payments on Treasury debt, as
envisioned under a bill that had been proposed by Sen. Pat Toomey
(R., Pa.).
Ms. Roseman said the challenge "would be more on the Treasury
side," adding that the department had concerns about its ability to
send certain types of payments to the Fed while withholding
others.
"But frankly, the Treasury had concerns about some of the
approaches we've ultimately adopted...in the past week or so that
it has now decided it would be able to do after all," she said. "So
I suspect that it would, with sufficient lead time -- at least in
weeks, not days -- be able to accommodate that."
"But it's something that, until you have developed the
procedures and tested the procedures, your comfort level is pretty
low," she added.
Ms. Roseman also said the Fed system would have been capable of
handling delayed coupon payments or delayed redemption of matured
securities if the Treasury changed its mind again and decided not
to prioritize payments. But she said it could create "very big
operational challenges and probably a lot of disruption" for other
market participants, who never anticipated the possibility of the
government missing a debt payment.
Write to Kate Davidson at kate.davidson@wsj.com
(END) Dow Jones Newswires
January 12, 2017 16:52 ET (21:52 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.