Debt Ceiling Crisis: How a Default Could Unfold

Shai Akabas, director of economic policy at the Bipartisan Policy Center, said an early warning sign that a default was coming could arrive in the form of a failed Treasury auction. The Treasury Department will also be closely tracking its expenditures and incoming tax revenue to forecast when a missed payment could happen.

At that point, Mr. Akabas said, Ms. Yellen is likely to issue a warning with the specific timing of when she predicts the United States will not be able to make all of its payments on time and announce the contingency plans she intends to pursue.

For investors, they will also receive updates through industry groups tracking the key deadlines for the Treasury to notify Fedwire that it will not make a scheduled payment.

A default would then set off a cascade of potential problems.

Rating firms have said a missed payment would merit a downgrade of America’s debt — and Moody’s has said it will not restore its Aaa rating until the debt ceiling was no longer subject to political brinkmanship.

International leaders have questioned whether the world should continue to tolerate repeated debt-ceiling crises given the integral role the United States plays in the global economy. Central bankers, politicians and economists have warned that a default would most likely tip America into a recession, leading to waves of second order effects from corporate bankruptcies to rising unemployment.

But those are just some of the risks known to be lurking.

“All of this is uncharted waters,” Mr. Akabas said. “There’s no playbook to go by.”

Luke Broadwater contributed reporting.