As debt impasse grinds on, anxieties growing

Recipients of federal benefits worry that their lifeline might be at risk

'I think we would have people declare civil "I think we would have people declare civil (Yoon S. Byun/Globe Staff)
By Todd Wallack and Taryn Luna
Globe Staff | Globe Correspondent / July 16, 2011

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If the federal government fails to raise the debt ceiling by Aug. 2, Army National Guard Specialist Julio Rodriguez may have to go without his $2,500 monthly salary.

For Randy Green, unemployment benefits could be at stake.

Retiree Laura Kirby worries that her Social Security check will not arrive next month.

Far from the fray in Washington, D.C., over whether Congress will allow the Treasury to borrow more money, people are reacting with a mixture of concern, skepticism, and disdain at the prospect of a government default. No one - not even the country’s sharpest economists - knows just what would happen if the government started running out of money to pay its bills, and few expect that to happen. But most everyone has something to say about a worst-case scenario.

“That would be a sad day because it wouldn’t just affect me,’’ said Rodriguez. “It would affect everyone who is counting on their money and expecting the government to be squared away.’’

Rodriguez, 39, of Lowell, said he supports himself and two young daughters on his Army pay. Last year, he suffered facial nerve damage during a tour of duty in Iraq, leaving him blind in one eye.

Like many others, he believes elected officials are trying to use the debt-ceiling standoff for political gain, a way to swoop in at the last moment with a solution and take credit for averting disaster.

“You ruffle a lot of feathers, and then you look like someone who’s coming to save the world at the end,’’ Rodriguez said.

The failure to reach an agreement to raise the debt ceiling has Green, an out-of-work ironworker, contemplating an unpleasant emergency option: seeking help from his five adult children. Green, 69, who lives in Roxbury, said he hasn’t brought home a steady paycheck since February. He can’t afford an interruption in his $625 weekly unemployment benefits.

“After two weeks, I’d be in trouble,’’ Green said.

While the state generally pays up to the first six months of unemployment, the federal government is currently picking up the tab for extensions. As with many forms of federal spending, it’s unclear whether long-term unemployment benefits would be affected by a default.

“This is completely unprecedented,’’ said Jay Powell, a former undersecretary at the US Treasury under President George H.W. Bush and a visiting scholar with the Bipartisan Policy Center in Washington, D.C. “There is no playbook. There is no road map here.’’

Powell said the government probably would have to cut crucial government programs, such as Social Security or defense spending. A default probably would also damage the country’s credit rating, analysts said, spooking financial markets and driving up interest rates. That would make it more expensive for government, businesses, and individuals to borrow money.

Still, most analysts and other observers are betting Congress and the White House will strike a last-minute deal.

“I would still place a very low probability on [a default] occurring,’’ said Tom Luster, a portfolio manager at Eaton Vance Corp., a Boston mutual fund company. “Cooler heads will prevail.’’

Until they do, however, Swati Wilson is sweating out whether to put her St. Louis home on the market.

“We’d be idiots’’ to try to sell a house if the debt ceiling isn’t upped, said Wilson, 45, who was visiting Boston this week. Even if she could find a buyer willing to pay the higher interest rates that a default would cause, Wilson said she would “take a beating’’ on the sale price. Home prices would fall because higher interest rates would scare away buyers.

Paul Gershkowitz, president of Greenpark Mortgage Corp. in Needham, said that in the event of a default, the Federal Housing Administration probably would stop guaranteeing new loans, which would make it more difficult for home buyers to obtain a mortgage. The agency backs about one-third of all US home mortgages.

“It would be disastrous,’’ Gershkowitz said. “I am hoping and praying our representatives in the government understand the value of democracy, capitalism, and the free markets, and they put partisan politics away and come up with a solution.’’

Meanwhile, some investors are trying to protect their money against a bad outcome.

Susan Kaplan, a certified financial planner in Newton, said she heard from about 10 clients in two days, all of whom were wondering whether they should retool their portfolios to minimize post-default damage.

“It’s the lead story on the news every night,’’ said Kaplan, who runs Kaplan Financial Services. “I think the general public has been whipped into a frenzy.’’

She said any impact of a debt default would probably be temporary because Congress would respond rapidly to the calamity, so investors - while rightfully anxious - should not panic.

Kirby, the Social Security recipient, can barely conceive of the government abruptly running short of cash in two weeks.

“I think we would have people declare civil war,’’ said Kirby, 76, who was passing through Boston from Somerset, Ky., this week. “I worry about people who need that [Social Security] check - half of America will be homeless.’’

Globe correspondent Kaivan Mangouri contributed to this report. Todd Wallack can be reached at; Taryn Luna can be reached at