Debt-limit uncertainty already stressing financial markets, Lew warns

Appearing before lawmakers a week before the deadline to raise the debt limit, Treasury Secretary Jacob J. Lew on Thursday warned that the uncertainty caused by the fiscal stalemate was stressing financial markets and could “deeply damage” the economic recovery and “the jobs and savings of millions of Americans.”

Lew also forcefully dismissed the idea being pushed by some Republicans that the Treasury could prioritize interest and principal payments to holders of government bonds to prevent a technical default if the $16.7-trillion debt limit isn’t raised by Oct. 17.

Although President Obama would prefer an increase that would put off another debt limit fight for a while, Lew said the White House was open to approving a short-term increase that would avoid a potential default for a month or so.

QUIZ: Test your knowledge about the debt limit

But Lew stressed that Congress must raise the debt limit by Oct. 17, when the Treasury will run out of borrowing authority and be dependent on cash on hand and incoming revenues to pay the federal government’s bills.

At that point, the government faces the risk of not being able to pay all its bills on any given day. Even if the Treasury prioritized some payments, which Lew said was technically very difficult, it would still be defaulting on some bills.

“I think prioritization is just default by another name,” he said. “It is just saying we will default on some subset of our obligations.”

Prioritization would be irresponsible and force the Obama administration to pick which bills to pay, Lew said.

“How can the United States choose whether to send Social Security checks to seniors or pay benefits to our veterans? How can the United States choose whether to provide children with food assistance or meet our obligations to Medicare providers?” Lew asked members of the Senate Finance Committee, noting that even if some payments are prioritized the U.S. for the first time will be unable to meet all its obligations.

“The United States should not be put in a position of making such perilous choices for our economy and our citizens,” he said. “There is no way of knowing the irrevocable damage such an approach would have on our economy and financial markets.”

Lew said that uncertainty about whether the debt limit will be raised is affecting financial markets as Congress and the White House battle over spending issues that have caused a partial federal government shutdown.

He said the interest rate on four-week Treasury bills at a government auction Tuesday nearly tripled compared with those sold the previous week, rising to the highest level since October 2008. Measures of stock market volatility have risen to the highest levels of the year.

“The only way to avoid inflicting further damage to the economy is for Congress to act,” Lew said.

Committee Chairman Max Baucus (D-Mont.) said lawmakers had the responsibility “to avoid another economic disaster” and raise the debt limit.

“In seven days, the United States will be at risk of defaulting on payments,” he said. “The United States of America, the richest, most powerful nation in the world, will be forced to look for loose change in the sofa in order to pay its bills.”

But Sen. Orrin Hatch (R-Utah) said Obama’s position that he will not negotiate on conditions to raising the debt limit was making it difficult to get an increase through Congress.

“This posture is neither productive nor helpful toward resolving the current impasse over the debt limit,” Hatch said. He added that of the 53 debt-limit increases since 1978, only 26 had no conditions, a so-called clean increase.

Hatch criticized administration officials for not specifying the size of the debt-limit increase they want.

“Mr. Secretary, all I’m asking is how much do you want and how long?” Hatch said.

Lew said it was up to Congress to decide on the size of the debt-limit increase, but that Obama believes the bigger the better. Still, Lew said, Obama was open to signing a short-term increase.

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