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The United States inches closer to a default on its debts and a downgrade of its AAA credit rating from the ratings companies. Talks collapsed on Friday and ended after less than an hour on Saturday. The "new" plans floated on Sunday are really old plans that deserve a place among the walking dead.

But what does default mean, exactly? As the Greek debt crisis and the "solution" to that crisis show, very little about this process is cut and dried. And stuff that seems like it should be definite -- like the term "default" itself -- is actually very, very squishy.

Turns out one of the big uncertainties is how long words -- which make up what I'd call the "delay and deny" defense -- can keep creditors at bay once you've run out of money and borrowing room.

Here's how a U.S. default would play out:

The phone call

If Congress doesn't raise the debt ceiling, the default process will begin with a phone call sometime on or after Aug. 2. The Federal Reserve will phone the U.S. Treasury and say something like, "Projecting the inflows and outflows to the Treasury's account, the account will be overdrawn by the end of the day. Do you want to deposit more funds or cancel some of the scheduled payments?"

This part of the process is clear-cut. The Fed is required by law to make this phone call and by law has no wiggle room. The Fed isn't allowed to let the Treasury overdraw its account. What happens next, though, isn't nearly as clear. And what the Treasury might do if it gets that call has as much to do with politics as it does with government finances.

image: Jim Jubak

Jim Jubak

The Treasury isn't talking about what it might do in response to that phone call, at least partly because the last thing the Obama administration wants to do is tell Congress it might have more time to avert a disaster. My best guess is that if the Treasury's judgment is that buying Congress a few extra days will result in a deal that avoids default, then the Treasury will find a trick or two or three -- such as borrowing from Fannie Mae or Freddie Mac -- to avoid a default.

If the politics say that a few days won't matter and that ratcheting up the pressure on Congress by holding back on issuing government checks or delaying payments due to vendors is more important, then the Treasury will start to practice triage on the government's obligations.

Would that be a default? As you and I understand the word, definitely. The U.S. would owe money to bondholders or Social Security recipients, or state governments, or military personnel, or vendors that sold it everything from computers to light bulbs, and it won't be sending out payments on time. It has an obligation to pay and it wouldn't be living up to that obligation.

But the reality is that a borrower isn't in default until a lender, creditor or credit-rating agency says he or she is. And it's frequently in the self-interest of the lending party or creditor not to call a default a default immediately.

The Greek example

You can see that in the Greek crisis, where the solution patched together last week -- requiring bondholders to roll over bonds that are maturing into new bonds with longer maturities -- actually is a default. Bondholders would not be getting the payments and the return of capital guaranteed to them by their original investment. The debtor has acted, by forcing that rollover, to delay the repayment of capital. And that's a default on the terms of the original debt.

But there's a big incentive for creditors and lenders to call a default something other than a default. Calling the Greek default a default, for example, might well trigger all the credit-default swaps and force sellers of that "insurance" in the derivatives market to pay up. (You might think that being able to collect on the insurance you've paid premiums to put in place would be attractive to those who bought the insurance, except that lots and lots of buyers are also sellers and no one is quite sure how the buying and selling would net out -- especially if some sellers were found to owe more than they could pay.)

Banks and national central banks and the European Central Bank don't want to call a default a default either, because that would destroy the value of collateral throughout the banking system and require central banks and national governments to find the money to capitalize banks that have, so far, funded themselves by borrowing against Greek government bonds. Politicians certainly don't want to call a default a default because they'd be forced to go to taxpayers for the money to recapitalize affected banks.

Moody's hasn't said Greece is in default yet, but says it is inevitable and has downgraded debt again. Fitch Ratings is calling it a "restricted default event," and Standard & Poor's is likely to take similar action. That will allow Greek creditors such as the European Central Bank pretend that a default isn't really a default and continue to lend money to Greek banks with Greek government debt as collateral.

The argument, flimsy as it is, for not calling this default a default and for not treating Greek government debt as defaulted debt is that the default won't last for very long (maybe) and will be cleared up (possibly) as soon as the full rescue plan is in place.

I think we can expect something similar for the U.S. if Congress fails to raise the debt ceiling -- a self-interested combination of delay and deny.