Tuesday, October 15, 2013

Nightmare Scenario: What Happens If We Actually, Truly Default?


Until recently, asking what would happen if the U.S. defaulted on its debt was like asking what unicorns like to eat for breakfast. It was simply an exercise in absurdity – a question whose answers lay outside the realm of possibility. But as it’s become increasingly clear that we could, in fact, default on our debt later this month, if the current attempts at striking a deal to extend the debt ceiling fall apart or simply take too long, it's worth trying to figure out what exactly would happen in a default scenario. 

In recent days, I’ve spoken to a number of financiers and policy experts on what could happen if we reach the “X Date” – the date on which the United States Treasury has burned through all of its cash, and is no longer able to cover its expenses. (The Bipartisan Policy Center expects this date to come between October 18 and November 1, but for simplicity's sake, let's assume it happens on an appropriately scary date – October 31, Halloween, and the day a huge interest payment on U.S. debt is due.)

I asked these experts to indulge me in a speculative exercise, and give me a medium-case scenario of what could happen on the X Date – not the worst-case scenario, not the best-case scenario, just a reasonably pessimistic imagining of how that day might go, from morning until night. Here's what they told me might happen:

12:00 a.m. – Staffers at the Treasury Department and the Federal Reserve will be up all night, testing vital systems before today's market opens. Several hours earlier, Treasury Secretary Jack Lew gave his staff notice that the U.S. would no longer be able to prioritize its payments – paying certain bills before others – and would have to miss a scheduled interest payment on its debt, triggering a technical default.
For the rest of the story: http://nymag.com/daily/intelligencer/2013/10/what-happens-if-we-actually-truly-default.html

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