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 In a letter to Republican Congressman Jeb Hensarling, a senior
aide to Treasury Secretary Jack Lew said the New York Federal
Reserve, which pays the principal and interest on government debt,
would be "technically capable" of continuing to make those payments
while Treasury halted other payments if the United States was unable
to borrow more money. The official stressed, however, that such a
system is untested.
Lew and other Treasury officials insisted during last October's debt
limit crisis, when the U.S. came close to defaulting on some
government obligations, that "prioritization" - a contingency
strategy where bond payments are made while other outlays such as
Social Security payments are halted - was not feasible.
In testimony to Congress, Lew said last October the government's
payment systems weren't designed to decide who gets paid and who
doesn't. "It would be chaos," Lew told Congress.
 During the debt ceiling crisis last year, when House Republicans
threatened not to extend the country's borrowing authority, Obama
administration officials were at pains to dismiss the idea of any
contingencies, lest that encouraged enough lawmakers to take the
country over the brink and into default.
Yet lawmakers and analysts have long suspected that in the event of
a default, Treasury and Fed officials would seek to keep current on
bond payments to keep investors from panicking, while halting other
payments as cash reserves ran out.
In the May 7 letter to Hensarling, the Republican Chairman of the
House Financial Services Committee, Treasury Assistant Secretary
Alistair Fitzpayne wrote: "If the debt limit were not raised, and
assuming Treasury had sufficient cash on hand, the New York Fed's
systems would be technologically capable of continuing to make
principal and interest payments while Treasury was not making other
kinds of payments."
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But, Fitzpayne added, "this approach would be entirely experimental
and create unacceptable risk to both domestic and global financial
markets. As we have repeatedly stated, this would mean that the
United States would default on its obligations, including to senior
citizens, veterans, and members of the military."
Mick Mulvaney, a Republican member of the House Financial Services
Committee, said on Friday he believed the letter proves payments can
be prioritized if the debt ceiling is not raised, and that a
financial meltdown would not occur.
"I've thought from the very beginning that the administration has
been stoking fear in what they say would happen if the debt limit is
not raised," Mulvaney told Reuters.
Congress extended the government's borrowing authority in October,
ending the crisis, and again in February, when it extended it
through March 2015.
(Reporting by Tim Reid; Editing by Diane Craft)
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