Possible U.S. debt-ceiling workarounds to avoid default

WASHINGTON (Reuters) - As Democratic President Joe Biden and House of Representatives Speaker Kevin McCarthy gird for a protracted battle over raising the United States' $31.4 trillion debt ceiling, some observers have suggested possible workarounds to avoid disaster if the two sides do not reach a deal.

Here are some of their proposals:

PLATINUM COIN

Some commentators have said the U.S. Treasury could mint high-value platinum coins and deposit them in the Federal Reserve in exchange for cash, which would give the government more money to spend.

Critics say that could disrupt financial markets, as investors might be reluctant to buy U.S. bonds not backed by congressional action, or call into question the soundness of a political system that would resort to such unorthodox tactics.

Others say it could spur inflation or undermine the independence of the Fed. Furthermore, the law that authorized platinum coins envisioned them as commemorative items, not currency.

Government officials including Treasury Secretary Janet Yellen have repeatedly dismissed the idea as a gimmick.

14TH AMENDMENT

Section Four of 14th Amendment to the U.S. Constitution, adopted after the 1861-1865 Civil War, states that the "validity of the public debt of the United States ... shall not be questioned." Historians say that aimed to ensure the federal government would not repudiate its debts, as some ex-Confederate states had done.

Some experts have suggested that Biden could invoke this amendment to raise the debt ceiling on his own if Congress does not act. That would almost certainly lead to prolonged legal wrangling, which could unsettle financial markets for the reasons outlined above.

BYPASS REPUBLICAN LEADERSHIP

Democrats and rank-and-file Republican allies in the House of Representatives could bypass McCarthy and force a vote on a "clean" debt ceiling increase, free of spending cuts or other conditions.

Because Republicans hold a narrow 222-212 majority in the House, only six of them would have to break with their party and side with Democrats in order to get the 218 votes needed to pass legislation.

This group could try to hijack an existing vote on another bill and substitute it with their preferred solution.

Alternatively, they could round up 218 signatures for a "discharge petition" to bypass legislative hurdles.

That takes time. Supporters must wait at least 30 days after they introduce their bill before they file their petition, and then must wait seven more legislative days after that.

If McCarthy or gatekeepers on the House Rules Committee still oppose the measure, supporters can still call it up for a vote -- but only on the second or fourth Monday of the month when the chamber is in session.

That leaves only three possible dates for action in the first half of this year: March 27, May 22 and June 12.

Discharge petitions have only succeeded twice in this century, in 2002 and 2015.

HIGH INTEREST BONDS

Some have suggested that the Treasury Department could sell bonds at higher interest rates than those that are dictated by market conditions. Under this scenario, Treasury could earn $38 billion by selling $35 billion worth of bonds at 5%, rather than 3.5%, and use the proceeds to retire more of its debt, giving it more space to operate under the existing debt limit.

Analysts say this would leave Treasury on the hook for higher interest payments and unsettle the market for Treasury bonds, which serve as a bedrock for the global financial system.

GET RID OF IT

Congress could vote to abolish the debt ceiling entirely, which would eliminate the need to vote on the issue periodically but also erode Congress's authority on fiscal matters.

Yellen has endorsed the idea, but Biden has dismissed it as "irresponsible" and prominent liberal lawmakers like Senator Bernie Sanders have ruled it out. Attempts to abolish the debt ceiling have gotten no traction in Congress in recent years.

Sources: Moody's Analytics; Congressional Research Service

(This story has been refiled to add the missing word 'trillion' in paragraph 1)

(Reporting by Andy Sullivan; Editing by Alistair Bell)