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On the Debt Ceiling, the Question Is: WWTD?

(Corrects date in eighth paragraph.)

What Would Treasury Do?

As soon as Feb. 15, the U.S. will reach a tipping point where its financial obligations exceed available revenue. The Bipartisan Policy Center estimates a $175 billion gap between payments and revenue in the month following what it calls "X-Date."

Without an increase in the debt ceiling, which at the moment seems rather unlikely, the Treasury will be forced to choose from a set of unappetizing options to help the U.S. avoid default.

So what would Treasury do?

Lawmakers, analysts and others say Treasury could simply begin prioritizing payments, servicing U.S. debt before anything else to ensure the U.S. doesn't default and violate its "full faith and credit" pledge.

On Monday, Louisiana Senator David Vitter and other Republican lawmakers once again pressed President Barack Obama to commit to a system of prioritization.

Legal scholars say the strategy is possible. Harvard Law School Professor Howell E. Jackson wrote one "potentially attractive" variation on the first-in, first-out model with which Treasury currently pays its bills would be to prioritize debt service "in recognition of the privileged status those payments might be said to be entitled under the Public Debt Clause." Treasury could make interest payments on the debt, which could run about $40 billion in February, with existing monthly revenue.

Still, many are unconvinced, including Fitch Ratings Ltd. which warned today that the U.S. would "very likely" suffer a credit downgrade absent a debt-ceiling increase.

"It is not assured that the Treasury would or legally could prioritize debt service over its myriad of other obligations," Fitch wrote.

The Obama administration has repeatedly thrown cold water on prioritizing payments. The president suggested last summer that simply paying foreign creditors, including the Chinese, while denying Social Security payments and military salaries would not go over well with most Americans.

The reluctance to prioritize appears to be more than just public posturing: According to an inspector general's report exploring Treasury's internal discussions during last summer's debt impasse, officials largely dismissed prioritization as unworkable and possibly illegal.

"While Congress enacted these expenditures, it did not prioritize them, nor did it direct the President or the Treasury to pay some expenses and not pay others," the report states. "Treasury officials determined that there is no fair or sensible way to pick and choose among the many bills that come due every day."

Treasury officials also ruled out selling the nation's supply of gold, fearing it "would undercut confidence in the U.S. both here and abroad, and would be destabilizing to the world financial system."

The best of the bad options, they determined, would be what I'll call the "Wimpy" option in which the U.S. will "gladly pay you Tuesday for a hamburger today." Under this scenario, Treasury would delay all payments -- no Social Security checks, military paychecks or salaries to federal workers -- until the U.S. had enough cash on hand to make a full day's worth of payments.

This would quickly send the U.S. down a slippery slope given it runs a budget deficit. A roughly $43 billion gap between revenue and payments would exist on day one, and that crevasse would only widen. As the Bipartisan Policy Center put it: "It might take two days of revenue collections to raise enough cash to make all of the payments due on day one." This, of course, would delay day two payments to a later date and so on, bringing joy only to Wimpy.

Obama fired a warning shot to Republican lawmakers during his news conference yesterday, saying: "There are no magic tricks here. There are no loopholes. There are no easy outs."

Judging from the look of things, he's right. Every option besides raising the debt ceiling is a lousy one.

(Deborah Solomon is a member of the Bloomberg View editorial board. Follow her on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.

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