Five ways the federal government can try to avoid bankruptcy

President Biden and Congress have roughly four months to avoid a self-inflicted economic disaster. After reaching the debt limit last week, the federal government can no longer issue new bonds to pay for spending already approved by lawmakers and the president.

A bipartisan agreement is the most likely and most certain outcome. But partisan divisions over federal spending and unrest in the GOP House majority make this battle over the debt limit one of the riskiest in recent memory.

Here are five ways the federal government could try to keep the U.S. from going bankrupt:

Biden makes a deal

Despite the political rumblings and threats of a showdown, most political analysts in Washington expect the latest debt ceiling battle to end the typical way: a bipartisan deal to eliminate the debt limit tied to a budget or spending agreement.

The 2011 debt ceiling crisis ended with former President Obama and the new GOP House majority agreeing to strict automatic budget cuts in 2013. Another standoff in 2013 led to the creation of a special committee, intended to enter into a long-term financing agreement.

Republicans are again pushing for spending cuts before agreeing to support increases in the debt ceiling, including for Social Security and Medicare. The White House has refused to negotiate, but may feel pressure to back down as a potential bankruptcy looms.

“Washington is probably months away from a tipping point where Congress needs to get serious,” Brian Gardner, chief Washington political strategist at investment bank Stifel, wrote in an analysis last week.

Request for release from liability

House GOP leaders oppose raising the debt ceiling without spending cuts. But House lawmakers could theoretically force the chamber to vote a clean increase in the debt ceiling through a “discharge petition.”

If House leaders block a bill in committee from reaching the floor, usually a majority of House members can force a vote on the measure by signing a discharge petition. That would allow all House Democrats and a handful of moderate Republicans to push a clean debt ceiling increase to the Senate.

However, Gardner said there are procedural hurdles and political pressures that make it difficult to prevent default through a discharge petition.

Only bills that have been pending in committee for at least 30 legislative days can be defeated by petition, he explained, and House leadership can still delay a vote.

“Discharge petitions are not useful tools in time-sensitive situations,” Gardner wrote.

Prioritization of payments

Republican lawmakers have suggested the Treasury Department could limit the damage from a sovereign debt default by keeping track of certain payments as they come due. Such a process, called prioritization of payments, would force the Treasury to choose U.S. bondholders over other spending.

However, legal and financial experts believe this is logistically impossible for the Treasury and would still cause serious financial damage if attempted.

“It seems inconceivable that bond investors, including many foreign investors, will get their money before American retirees, the military or even the federal government’s electricity bill for a long time,” Mark Zandi, chief economist at Moody’s Analytics, wrote in a Monday research note.

Invoking the 14th Amendment

Some historians and legal experts say Biden may try to invoke a provision of the 14th Amendment to the Constitution that dictates that debt owed by the federal government “shall not be questioned” and force the Department of the Treasury to lift the debt limit.

Although Biden could try to create a new legal path to avoid bankruptcy, Zandi said it would still come at a huge financial cost.

“Investors would rightly wonder if using the amendment to repeal the debt limit law would hold up in the courts, and even if it did, what it would mean for the checks and balances of our political system,” he wrote.

Minting a $1 trillion coin

Both Biden and Obama faced pressure to order the minting of the $1 trillion coin under a 1990 law that gave the Treasury secretary full authority over the issuance, design and set value of platinum-based coins. The platinum coin would then be deposited with the Federal Reserve and credited to the Treasury, thus avoiding default.

“The president and the Treasury secretary have a big red button they can push at any time that can completely end this whole charade,” Rohan Gray, assistant professor of law at Willamette University and platinum advocate, said in an interview in Tuesday.

However, Treasury Secretary Janet Yellen on Sunday called the coin a “gimmick” that the Fed may not accept, making it clear that she is unlikely to issue one.

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