US admits it can prioritise payments in default crisis

In a letter to Republican Congressman Jeb Hensarling, a senior aide to Treasury Secretary Jack Lew said the New York Federal Reserve, which pays the principal and interest on government debt, would be "technically capable" of continuing to make those payments while Treasury halted other payments if the US was unable to borrow more money. The official stressed, however, that such a system is untested.

Yet lawmakers and analysts have long suspected that in the event of a default, Treasury and Fed officials would seek to keep making bond payments to stop investors panicking, while halting other payments as cash reserves ran out.

In the May 7 letter to Mr Hensarling, the Republican chairman of the House Financial Services Committee, Treasury Assistant Secretary Alistair Fitzpayne wrote: "If the debt limit were not raised, and assuming Treasury had sufficient cash on hand, the New York Fed's systems would be technologically capable of continuing to make principal and interest payments while Treasury was not making other kinds of payments."

But Mr Fitzpayne added: "This approach would be entirely experimental and create unacceptable risk to both domestic and global financial markets. As we have repeatedly stated, this would mean that the United States would default on its obligations, including to senior citizens, veterans, and members of the military."

Mick Mulvaney, a Republican member of the House Financial Services Committee, said on Friday he believed the letter proves payments can be prioritised if the debt ceiling is not raised, and that a financial meltdown would not occur.

"I've thought from the very beginning that the administration has been stoking fear in what they say would happen if the debt limit is not raised," Mr Mulvaney told Reuters.

Congress extended the government's borrowing authority in October, ending the crisis, and again in February, when it extended it through March 2015.

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