September and October may be the most important months for Congress and President Trump to not fall down on the job.
Lawmakers will have to pass legislation on several deadline-driven issues.
But of all of them, one is a must-pass, fail-at-everyone’s-peril priority: Raise or suspend the country’s debt ceiling.
Treasury Secretary Steven Mnuchin has said he feels confident that the Treasury can continue paying the country’s bills in full and on time through September 29 without breaching the limit, currently set at $19.81 trillion.
Since mid-March, when the most recent debt ceiling suspension expired, Mnuchin has had to use special accounting measures to stay under the limit. He estimates those measures will be tapped out by the end of September. Others, like the Congressional Budget Office, have estimated the so-called X date could come in the first half of October.
Neither lawmakers nor Trump would benefit by delaying a debt ceiling increase past the X date. The general expectation is that they’ll get it done, if only in the nick of time.
Related: Mnuchin calls out debt limit as a ‘ridiculous concept’
But given how politically isolated the president has become, and the fact that raising the debt ceiling is often contentious for lawmakers, you can’t take that to the bank until they pass a fix.
Here’s what could happen if they don’t lift the ceiling in time:
Payments won’t be made
At a certain point, Mnuchin won’t have enough revenue and cash on hand to pay everything the federal government owes.
The Treasury, which makes roughly 80 million payments a month, would then be left in an untenable position. It may try to pay some bills and delay others, or delay all bills due on the same day until it has enough money to pay them in full.
Some observers say the country would only be perceived to be in default if bondholders don’t get paid. So some Republicans have suggested Treasury should prioritize those payments over all others. While Treasury may have the capacity to do so, “such operations would be unprecedented and of uncertain legality,” according to the Bipartisan Policy Center.
Others believe that missing any payments on a legal obligation constitutes default — whether it’s to a federal contractor, a Social Security beneficiary, a civil servant or a U.S. soldier.
For his part, Mnuchin isn’t making distinctions.
“I have no intent on prioritizing. That doesn’t make sense,” he said at a recent Congressional hearing. What he’d do instead is unclear.
The economy could be stung
If payments are delayed more than a few days, it could take a toll economically.
“Federal employees, contractors, program beneficiaries, businesses and state and local governments would find themselves suddenly short of expected cash, causing a ripple effect through the economy,” Donald Marron, director of economic policy intiatives at the Urban Institute, told lawmakers during one of the last knock-down-drag-out fights.
Markets may freak
If the situation is not remedied soon after the X date occurs — and especially if any bond payments are delayed — world markets may react very badly.
Why? The self-inflicted crisis would signal extreme dysfunction in the world’s largest economy. And investors would worry because the U.S. bond market is the most liquid in the world. Instill doubt about the full faith and credit of the United States, and it’s unclear how punishing investors’ response would be.
As it is, even when Congress averts default but waits until the last minute to lift the debt ceiling, U.S. bond rates — and therefore federal borrowing costs — can go up.
The Government Accountability Office and the Federal Reserve found in 2011 and 2013 those costs rose by hundreds of millions of dollars in each of those years. The long-term cost would be much higher if you factor in the duration of the debt that was issued at those elevated rates, according to the Bipartisan Policy Center.
Credit could be downgraded
In the summer of 2011, Congress fought bitterly about the debt ceiling before finally raising the nation’s borrowing limit on August 2, barely averting default. Standard & Poor’s called foulanyway and stripped the United States of its sterling AAA credit rating three days later.
“The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed,” the credit agency said at the time.