Report Predicts Chaos If U.S. Prioritizes Payments

* $135 billion shortfall in August if U.S. defaults

* Choosing winners and losers in default will be "chaos"

* $500 billion of maturing debt must be paid in August

By Tim Reid

WASHINGTON (Reuters) - Any attempt to prioritize federal payments if Congress fails to raise the U.S. debt limit and the country defaults would rapidly descend into chaos, according to an independent study released Tuesday.

If the U.S. government cannot borrow more money to meet its obligations past Aug. 2 -- the Treasury's deadline for raising the federal borrowing limit -- it will be unable to pay between 40 to 45 percent of the 80 million payments it makes every month, the report says.

After analyzing thousands of publicly available documents, including the Treasury's daily cash outlays, the Washington-based Bipartisan Policy Center concludes that prioritizing payments to avoid default -- which some conservative Republican lawmakers advocate -- is essentially impossible.

Treasury Secretary Timothy Geithner has been making the same argument for months -- prioritizing can't be done. The report is the first detailed independent analysis that appears to support his assertion that a default cannot be managed, or "staggered."

The policy center estimates that between Aug. 3 and Aug. 31, the Treasury will receive $172 billion in revenues but have approximately $307 billion in obligations, leaving a monthly deficit of $135 billion.

But if Treasury tried to meet some obligations before others -- paying Social Security and interest on U.S. debt, for example, rather than federal salaries -- "very popular programs would go unfunded, whichever way you tried to prioritize payments," said Jay Powell, a former Treasury official under President George H.W. Bush and one of the report's authors.

PICKING WINNERS AND LOSERS

For example, in one scenario, the center used projected August revenues to fully fund six major programs or obligations: interest on government debt; Social Security payments; Medicare and Medicaid; unemployment insurance benefits, and defense vendor payments.

Those six would eat up the entire month's revenues, leaving other obligations, including active-duty troops, the Justice Department and the Education Department, entirely unfunded.

"So to fund any of the unfunded items, you would have to cut from the six major programs," Powell said. "It would be chaotic and unfair. Treasury would be picking winners and losers. There would be public uproar."

Powell said the Treasury makes 3 million payments each day. Trying to override government computer systems, which are programmed to make payments as they fall due, would be a Herculean task, he said.

The center also analyzed projected payments and revenues for each day in August. Some days look particularly difficult. On Aug. 15, for example, Treasury will have $41 billion in committed spending -- including $29 billion in interest payments -- and just $22 billion in revenues.

"Some days will be really ugly," Powell said.

The report also states that Treasury must repay almost $500 billion in maturing debt through August, and will need to auction new debt to pay the old debt.

But if America is in default, Powell said, "the Treasury might lose market access to sell the equivalent amount of debt to pay the maturing debt."