federal debt, default, debt ceiling, structured finance, special-purpose entities, SPEs, back-to-back borrowing, future tax revenues, securities, Executive Order, congressional authorization, public finance
Even a “technical” default by the United States on its debt, such as a delay in paying principal or interest due to Congress’s failure to raise the federal debt ceiling, could have serious systemic consequences, destroying financial markets and undermining job creation, consumer spending, and economic growth. The ongoing political gamesmanship between Congress and the Executive Branch has been threatening — and even if temporarily resolved, almost certainly will continue to threaten — such a default. The various options discussed in the media for averting a default have not been legally and pragmatically viable. This article proposes new options for avoiding default, arguing that although the Executive Branch lacks authority to directly issue Treasury securities above the debt ceiling, it has the power to raise financing by monetizing future tax revenues. In each of the proposed options, a non-governmental special-purpose entity (SPE) would issue securities in amounts needed to repay maturing federal debt. Depending on the option, the SPE would either on-lend the proceeds of its issued securities to the Treasury Department on a non-recourse basis, secured by future tax revenues; or the SPE would use the proceeds of its issued securities to purchase rights to future tax revenues from the Treasury Department. In each case, therefore, future tax revenues would form the basis of repayment to investors.
These options should be legally valid and constitutional, notwithstanding the debt ceiling: neither involves the issuance of general-obligation or full-faith-and-credit government debt, and indeed the second option doesn’t involve the issuance of any government debt. Furthermore, based on the similarities of these options to successful financing transactions that are widely used in the United States and abroad, the securities issued thereunder should receive high credit ratings and also be attractive to investors. Because of provisions in foreign treaties, those securities should be especially attractive to foreign investors — who already purchase half of all Treasury securities.
These options are not intended to be standard financing structures. Being riskier than full-faith-and-credit Treasury securities, the securities issued under these options would almost certainly have to pay a higher interest rate than Treasury securities. The options should therefore be viewed, and this article presents them, as viable emergency measures, if needed, to avoid a U.S. debt default.
Steven L. Schwarcz, Bypassing Congress on Federal Debt: Executive Branch Options to Avoid Default, Yale Journal on Regulation (forthcoming)