YEREVAN, October 10. /ARKA/. U.S. Treasury and Federal Reserve officials worried about the growing possibility of a catastrophic default are crafting contingency plans to mitigate the economic fallout if Congress fails to extend America's borrowing authority, a source familiar with the plans said.
With just eight days before the Treasury Department says the U.S. will hit its $16.7 trillion borrowing limit, lawmakers and the White House remain far fr om a deal to extend it. Officials are examining what options might be available to calm financial markets if a U.S. debt payment is missed.
The specifics of their planning remain unclear, but the source said an area of special focus is a key bank funding market known as the tri-party repurchase agreement, or repo, market, wh ere banks often use Treasury bills, notes and bonds as collateral for short-term loans fr om other banks and big money market funds.
Some of the earliest alarm bells for the 2008 financial crisis emerged fr om this market, and on Wednesday interest rates demanded for accepting some T-bills as collateral shot to the highest in five months. Were the repo market to seize, easy access to cash by banks to meet short-term funding needs could be jeopardized, and that could have far-ranging implications for credit markets and the economy.
The source, who asked not to be identified, said officials refused to divulge details of the plans because they do not want to suggest to investors and Republican Congress members that the U.S. government can muddle through if the debt limit is not raised. Officials insisted there was no way to avoid an eventual default if the debt lim it is not raised.
On Thursday, U.S. Treasury Secretary Jack Lew is scheduled to testify before the Senate Finance Committee and is likely to be grilled about the contingency plans by Senator Orrin Hatch, the panel's top Republican.
The source said officials believe their plans can only try to mitigate fallout they expect to be catastrophic if Congress fails to raise the debt lim it by Oct. 17, the date Treasury estimates it will run out of additional borrowing authority.
Against that anxious backdrop, officials are trying to gauge which Treasury securities pledged as collateral would cause the most concern in a default, the source said. –0--