Appearing before the Senate Finance Committee Thursday, Treasury Secretary Janet Yellen said in no uncertain terms that she does not think a Republican proposal for the U.S. to prioritize its debt payments in the event of a default is viable.

The U.S. bumped up against the federal debt limit in January, forcing the Treasury to start taking “extraordinary measures” to make its payments. Absent an increase or suspension in the federal debt limit, the Treasury could be unable to meet its obligations at some point this summer or early fall — an outcome that Yellen and many economists have warned could lead to a global financial catastrophe.

Some Republicans, however, think that the U.S. can avoid a technical default by prioritizing its debt payments, even if other obligations such as paying salaries at government agencies go unpaid. A bill taken up last week by the House Ways and Means Committee would instruct the Treasury Department on how to prioritize its payments in the event that the debt limit makes it impossible to meet all federal obligations in full.

The “Default Prevention Act” would require the Treasury to first pay all principal and interest on the national debt and all Social Security and Medicare benefits. After those payments are made, the Treasury would be required to prioritize defense and veterans’ benefits. It would also be forbidden from paying for government travel and salaries for the executive branch and Congress until all other obligations have been met.

Yellen stated plainly that she doesn’t think such a plan would work. “The government on average makes millions of payments each day, and our systems are built to pay all of our bills on time and not to pick and choose which ones to pay,” she told the committee. “It’s simply a recipe for economic and financial catastrophe to think we can pay some of our bills and not all of them.”

Yellen also said that she “cannot give any assurances about the technical feasibility of such a plan. It would be an exceptionally risky, untested, and radical departure from normal payment practices of agencies across the federal government.”

Calling debt prioritization “default by just another name,” Yellen called on Congress to skip the disaster contingency planning and to instead “come together to recognize that raising the debt ceiling is their responsibility to protect the full faith and credit of the United States.”

The bottom line: Republicans have announced their intention to use the need to raise the debt ceiling as leverage in their campaign to slash federal spending. Though they have yet to provide a detailed budgetary plan, the fact that they are discussing contingency plans suggests that at least some GOP lawmakers are locked into their game of debt-limit chicken with the White House.

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Source: finance.yahoo.com