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Mnuchin Says Prioritizing Debt Payments `Doesn't Make Sense'

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U.S. Treasury Secretary Steven Mnuchin ruled out prioritizing U.S. debt payments if Congress fails to raise the borrowing limit and repeated his call for quick action by lawmakers.

“I have no intent on prioritizing” debt payments, Mnuchin told a House Financial Services panel in Washington on Thursday. “That doesn’t make sense. The government should honor all of its obligations and the debt limit should be raised.”

(Related: Money Manager Predicts Japan Will Restructure Its Debt)

The secretary’s comments come after members of his department called bond traders to assure them the government wouldn’t employ a secret plan written during the Obama administration to make sure debt payments are made, potentially at the expense of salaries for government employees, payments to contractors and other obligations.

Some lawmakers have pointed to debt-payment prioritization as an option if the debt ceiling isn’t lifted. The 170-member Republican Study Committee on Thursday decided to back debt prioritization as one of its approaches to the debt ceiling. The RSC is pushing a bill by Rep. Tom McClintock to prioritize public debt over other obligations in the event extraordinary measures run out.

But many investors may regard such a maneuver as the equivalent of a first-ever default on the national debt. Mnuchin’s predecessor Jacob J. Lew called prioritization “default by another name.”

The government has been relying on special accounting maneuvers since March to stay under the nearly $20 trillion debt cap. The Congressional Budget Office estimates the Treasury can fund the government through early-to mid-October under the current borrowing limit, though Mnuchin has estimated a slightly shorter timeline by the end of September. He’s repeatedly asked lawmakers to act before they leave for their summer recess in August.

Mnuchin said Wednesday that delaying a decision has real costs in terms of higher interest rates for some government borrowing and implied costs from market uncertainty.

“I am very focused on the debt limit, and as I’ve said before, I urge Congress to work on this before anybody leaves,” Mnuchin said Thursday.

—With assistance from Erik Wasson.

— Read Fitch May Downgrade U.S. Over Debt  on ThinkAdvisor.