ALMOST everyone takes it for granted that a failure to raise the debt ceiling will eventually force the United States to default on its Treasury debt. This notion is superficially puzzling. The question is addressed in this week's issue of The Economist. I'll dig into it a bit more here.

A default would result from failure to pay principal or interest. The debt ceiling doesn't bar either. Treasury can roll over maturing issues so long as the overall stock of outstanding debt doesn't rise. (A caveat: Treasury must invest surplus Social Security and Medicare taxes by issuing non-marketable debt to the plans' trust funds, which erodes the remaining capacity for marketable debt.) As for interest, even in today's straightened circumstances, revenue is more than enough to cover interest charges. The helpful table below from Lou Crandall of Wrightson ICAP shows that in every month this year, projected cash receipts comfortably exceed interest payments; the narrowest margin comes in November, when receipts exceed interest by $131 billion.

What this clearly means is that Treasury can easily remain current on existing debt, provided it is willing to suspend some non-interest outlays. Does it have the authority to do so? What is the relative seniority of creditors of the United States government? States often specify the relative seniority of their bondholders either in their constitution or statute; in California, for example, bond holders stand ahead of all creditors except schools. Illinois has remained current on its bond debt while racking up some $6 billion in unpaid bills to other creditors.

I have yet to find a similar ranking for the federal government. This should not be surprising; the United States has never defaulted. There is the fourteenth amendment to the constitution which says: “The validity of the public debt of the United States… shall not be questioned.” The purpose of this section was to forbid the United States from honouring Confederate debts. The Supreme Court has apparently ruled that it also bars Congress from voiding a government bond, although not from abrogating the gold clause as it did in 1934.

I've poked around on this, and it seems to be a legal black hole. A bond is in essence a contract; does a contractual obligation rank ahead or behind a statutory obligation such as Social Security cheques? This is a matter of interpretation that, I am told, is largely up to the federal government itself. Without explicit guidance otherwise, Treasury would pay obligations in the order that they come due, which could clearly mean missing an interest payment.

However, some statutes, and the actions of the Clinton Administration in 1995-96, suggest that non-interest obligations are not sacrosanct. Several laws explicitly consider the possibility of late payment; the Prompt Payment Act dictates the interest penalties the federal government must pay for late payment to commercial vendors while the Internal Revenue Code does the same for late tax refunds. During the government shutdown of 1995-1996 (which was triggered not by the debt ceiling but by failure to enact appropriations), the Office of Management and Budget apparently did establish priority among various outlay categories. However, that would not have addressed bond interest which is subject to a permanent appropriation.

In early 1996, Bill Clinton warned that because the debt ceiling had not been raised, Social Security cheques might be late. This scared Congress into passing a small increase in the debt ceiling solely to meet Social Security payments. Treasury could acquire considerable additional borrowing room by not issuing non-marketable debt to the Social Security and Medicare Trust funds and by failing to rollover existing issues as they come due, and issuing IOUs in their place, as it does with the civil-service pension funds. While it seems to have rejected that option in the past, I'm not sure it is legally off limits. (Though this simply means replacing one IOU with another, it would be politically explosive; the public thinks of the trust funds as inviolable lock boxes, not accounting entries.)

Thus, it seems to me that if Tim Geithner has to make a choice, he can, and should, prioritise bond interest. To be sure, failure to pay Social Security cheques or any other payment on time would cause hardship for recipients, provoke a public backlash against the administration, Congress or both, and embarrassment for the United States; after all, how can the world's most powerful economy not pay its bills on time? But even a brief default on Treasury debt would be unprecedented, with widespread systemic ramifications. Would banks around the world have to classify Treasury holdings as non-performing? Would money-market mutual funds break the buck? Would all federal entities lose their AAA-credit rating? Would the Federal Deposit Insurance Corporation's ability to backstop the nation's banks come into question? Would foreign central banks start to shift out of dollars? Since no one doubts the ability of Treasury to pay once the debt ceiling is lifted, it's conceivable the damage would be containable; but why take the risk?

The consequences of defaulting on other obligations should not be minimised, either. The federal government now has to borrow about 40 cents of every dollar it spends. A prolonged inability to meet 40% of its obligations would sow economic disarray, trigger litigation, and eventually raise doubts about its ability to meet any obligations. Illinois's gaping credit-default-swap spreads suggest its inability to pay non-interest bills factors into the market's assessment of its ability to service bond debt. Failure to raise the debt ceiling need not entail default; but it would still ding Uncle Sam's credit rating.