US Treasury secretly weighs options to avert default

A small team of Treasury officials is discussing options to stave off default if Congress fails to raise the country's borrowing limit by an August 2 deadline, sources familiar with the matter said.

Senior officials, including Treasury Secretary Timothy Geithner, have repeatedly said there are no contingency plans if lawmakers do not give the US government the authority to borrow more money.

But behind the scenes, top Treasury officials have been exploring ways to prevent a financial meltdown that would be triggered if the government were unable to pay its bills on time, sources told.

The Treasury team has also spoken to the Federal Reserve about how the central bank specifically the New York Federal Reserve Bank – would operate as Treasury's broker – in the markets if a deal to raise the United States' $14.3 trillion borrowing cap is not reached on time.

The US government currently borrows about $125 billion each month. The Obama administration wants Congress to raise the limit by more than $2 trillion to meet the country's borrowing needs through the 2012 presidential election.

The contingency discussions, which have remained a closely guarded secret throughout weeks of negotiations with Congress over the debt ceiling, are being led by Mary Miller, Assistant Secretary for Financial Markets, who is effectively custodian of the country's public debt.

Miller's team has debated whether Obama could ignore Congress and order continued borrowing -- by relying on the 14th Amendment of the US Constitution – if it fails to raise the borrowing cap.

The fourth section of the 14th Amendment states the United States' public debt "shall not be questioned." Some argue the clause means the government cannot renege on its debts.

Obama dismissed talk of invoking the amendment yesterday. "I don't think we should even get to the constitutional issue," he said. "Congress has a responsibility to make sure we pay our bills. We've always paid them in the past."

The White House declined to comment on the discussions at Treasury, but administration officials sought to tamp down talk of relying on the 14th Amendment. There has been growing speculation in Washington in recent days that the administration could use the amendment to ignore the congressionally imposed limit on the amount of money the United States can borrow.

"Despite suggestions to the contrary, the 14th Amendment is not a failsafe that would allow the government to avoid defaulting on its obligations," said White House spokeswoman Amy Brundage.

Miller's team has discussed the Government Accountability Office's 1985 assessment that Treasury has the authority to prioritize payments in the event of a default – an option Treasury officials have been wary of.

The administration's nightmare scenario is that investors panic at the prospect of a default, triggering a crisis that eclipses the 2008 financial meltdown. That could plunge the US. economy into another recession, something that could doom Obama's re-election prospects in 2012.

Some conservative Republicans have argued the Treasury can prioritize payments and manage a default. The administration wants to keep lawmakers focused on the August 2 deadline, and even a hint of a "Plan B" could lessen the urgency to strike a deal by then.

"As we have said repeatedly over the past six months, there is no alternative to raising the debt limit," Treasury spokeswoman Colleen Murray said when asked to comment on the Treasury discussions.

"The only way to prevent a default crisis and protect America's credit-worthiness is to enact a timely debt limit increase, which we remain confident Congress will do."

Obama meets leaders from both parties at the White House today as he seeks to get an agreement to cut trillions from the US deficit, which Republicans have demanded in exchange for their support to raise the debt limit.