Yellen’s Team Rejects Debt Prioritization on Borrowing Limit

(Bloomberg) -- Treasury Secretary Janet Yellen's team doesn't see prioritizing payments to creditors as an option should the U.S. government exhaust its traditional measures to avoid a default induced by the debt limit, the department said Thursday.

The U.S. “pays all its bills on time,” said Treasury spokeswoman Lily Adams. “The only way for the government to address the debt ceiling is for Congress to raise or suspend the limit, just as they've done dozens of times before.”

Treasury's dismissal of the step may put to rest the idea that Yellen would turn to plans devised in 2011 during the Obama administration to prioritize payments on government securities over other obligations.

Earlier Wednesday, Yellen warned that the Treasury would probably exhaust its ability to avoid breaching the federal debt limit sometime in October, sending a message to congressional leaders as she prepares to step up talks with lawmakers on boosting or suspending the ceiling.

When the nation almost breached the statutory limit a decade ago, the Federal Reserve and Treasury drew up contingency plans that were kept secret until transcripts of a conference call at the central bank were released following a customary five-year lag.

Read: Fed Debt-Limit Contingency Plans Detailed in 2011 Transcripts

The Fed transcripts revealed that just before protracted negotiations concluded with Congress raising the debt ceiling in 2011, Fed officials were briefed about how its staff and the Treasury had worked together to develop a plan to handle debt payments in the event they had to be “prioritized or at least not fully paid.”

Under the contingency plan, holders of U.S. debt and recipients of Social Security, veterans benefits and other entitlements would be paid first. Everyone else, including government contractors and federal employees, would be at risk of payment delays or partial payments.

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