The startling prospect of the United States defaulting on its debt is such a rare scenario that it is unclear precisely how the catastrophe would unfold.
One thing is certain: It begins with Uncle Sam reaching into his pockets and finding them empty.
"I don't think people know exactly what the sequence will be, but at some point there will be a bill in U.S. dollars that the Americans cannot pay," says Tom Courchene, an economics professor at Queen's University.
Time is running out for Washington to avert default, which could plunge the U.S. into another financial crisis and leave America's ailing economy even sicker than it was before.
Courchene sees three potential outcomes for the United States as it nears the Aug. 2 deadline, at which point the U.S. Treasury believes a default could proceed.
The first scenario is the dreaded default, which would result if Congress simply does not make any progress in bipartisan debt negotiations.
That would mean that the debt ceiling, which is currently capped at $14.3 trillion, is left untouched and the Treasury soon reaches a point in which it can't borrow the money it needs to run the country.
Amazingly, the U.S. has been up against its debt ceiling for weeks but has managed to avoid defaulting by using what the Treasury describes as "extraordinary measures to create additional headroom under the debt limit."
The second of August is when the Treasury believes those measures will be fully exhausted, which is why it is urging lawmakers to increase the debt limit immediately.
As the weekend approached, Republicans and Democrats appeared far apart in negotiations, though U.S. President Barack Obama continued to call for a broader deal that will address the immediate debt crisis and the deficit challenges that loom alongside it.
"This debate shouldn't just be about avoiding the catastrophe of not paying our bills and defaulting on our debt. That's the least we should do," Obama wrote in an opinion piece posted to the USA Today website Thursday evening.
But avoiding a default is paramount: If America fails to pay its bills on time, its creditors will demand higher interest rates, its reputation will take a major hit in markets and investors could begin to drop their holdings in U.S. dollars.
The Treasury warns that a default would constitute "an unprecedented event in American history," which would plunge the U.S. into another financial crisis when the country is still recovering from the last one.
"I don't know what happens because we haven't seen many defaults," Courchene says.
Courchene sees two other possibilities outside of a possible default: Congress could agree to Obama's plan to cut spending and raise the debt ceiling, or legislators could simply raise the debt ceiling to avert default and put off the debate on America's finances.
The plan that Obama is advocating is a "win-win situation" for the U.S. and markets, Courchene says, because it would boost confidence and trim the deficit.
This option would be good for markets and would prompt little change in interest rates due to uncertainty, says Courchene.
Courchene says the remaining scenario in which Congress agrees to alleviate the debt ceiling pressure, but delays the debate on how to balance the books, is somewhere in between a default and Obama's so-called "grand bargain" deal.
"There won't be the default issue, but there will be increasing concern that the U.S. system is not viable, and that will lead also to a rise in interest rates, but maybe not as dramatic as the default," Courchene says.
"And so then people are going to be more and more cautious about holding U.S. dollars because this U.S. situation is unstable and eventually it's going to hit the tipping point."
With files from The Associated Press
