US Government Debt Different - Finance Department - University of ...

294The 2011 Debt Limit Impasse: Treasury’s Actions & The Counterfactual – What Might Have Happened if the National Debt Hit the Statutory Limiton government bonds, 251 leaving $148 billion in inflows to pay$276 billion in obligations. 252 Presumably, the remainder of theseobligations would have been made using a FIFO approach. 253Notably, protecting from technical default alone may not have beensufficient to prevent a negative market reaction, especially in light ofthe CDS definition of “credit event,” which includes failure to payany “obligation.” 254Theory 2B: The President Must Prioritize Bondholder PaymentsStatus of Funds utilizedduring DISPInterest Payments toBondholders(Aug. 2 – Aug. 31)Mandatory Spending onEntitlements(Aug. 2 – Aug. 31)AppropriatedDiscretionary Spending(Aug. 2 – Aug. 31)Proportion of totalexpenses paid Aug. 2 –Aug. 31Outstanding Debt onAug. 31DISP likely would have been extended; Fundswould not have been made whole on Aug. 2Paid, as scheduled ($38 billion) 255With no authority to prioritize, entitlementswould likely be subject to a FIFO payment schemeWith no authority to prioritize, discretionaryexpenseswould likely be subject to a FIFOpayment scheme59% (54% of non-interest expenses) 256$14.294 trillion, as approved in Feb. 2010legislation251Treasury Direct, supra note 199.252Id.253See supra Theory 1. Prioritizing interest would have presented a unique difficulty under aFIFO approach in that $32 billion was due to be paid on Aug. 15. Inflows from that day alonewould have been insufficient to make such a payment. Therefore, funds would have to havebeen set-aside in advance, prioritizing a future payment over payments already due.254See Austin & Miller, supra note 245 at 11-12; see also International Swaps and DerivativesAssociation, CDS on US Sovereign Debt Q&A, http://www2.isda.org/news/cds-on-ussovereign-debt-qampa.“A CDS is triggered when a Credit Event occurs. There are three CreditEvents that are typically used for Sovereigns such as the United States. They are: Failure to Pay;Repudiation/Moratorium and Restructuring . . . . ‘Failure to Pay means, after the expiration ofany applicable Grace Period . . . . the failure by a Reference Entity to make, when and wheredue, any payments in an aggregate amount of not less that the Payment requirement underone or more Obligations, in accordance with the terms of such Obligation at the time of suchfailure.’” (emphasis added). The grace period for U.S. CDS is 3 days. The U.S. CDS marketis relatively small, and exposures are limited, so the triggering of CDS alone would not be alarge threat to the economy at this time. However, if the U.S. CDS market grows, or if thebroader market is afflicted with contagion concerns upon a triggering event, the danger to theU.S. economy could be large, despite continued payment on the reference entity (Treasurysecurities).