Treasury Leaks Worst Case Contingency Plan: Creditors Get Priority In Case Of Technical Default

Things are getting real. After all the bluffing, huffing and puffing by Geithner, the rating agencies, and anything with a pulse and a TV or radio pulpit has failed, the last trump card is coming down. While yesterday the Treasury informed that it would not disclose any details of its contingency plan, Bloomberg has just learned via a Treasury leak that the US government will give priority to bondholders. From Bloomberg: "The U.S. Treasury will give priority to making interest payments to holders of government bonds when due if lawmakers fail to reach an agreement to raise the debt ceiling, according to an administration official. The official requested anonymity because no announcement has been made. The Treasury has said about $90b in debt matures on Aug. 4 and more than $30b in interest comes due Aug. 15. Overall, more than $500b matures in August." And so it begins: while the Treasury has not yet pushed the big red flashing button, this leak is nothing but it latest and greatest bluff. It also means that America will, indeed default, next week, as the absence of a contractual payment is a default. And then we get into the fine print with the rating agencies whether or not X is default but Y is not. At that point however it won't matter: every form of intermarket liquidity will be permanently gone as Lehman will be a cherished walk in the park. Thank you Tim Geithner and your total lack of contingency plans.