The choice between defaulting on U.S. government debt and raising the debt ceiling is a false choice, investment strategists with PNC Financial Services Group Inc (NYSE:PNC) said in a report this week.

“Contrary to popular notion that once the United States runs out of extraordinary measures and moves past the October 17 date it will default on its government debt, the reality is far from so definitive,” PNC said in its market update.

The Treasury cannot increase the outstanding debt until the debt ceiling is raised, but it can suspend some federal payments to agencies that adjust their payment schedules, and the Obama administration may delay appropriations, to defense or local governments, for example.

Of course, President Obama could also invoke the Fourteenth Amendment and ignore the debt limit. The amendment states the “validity of the public debt… shall not be questioned.” But this would be controversial and likely questioned in court.

The Treasury may also prioritize payments, and Congress may authorize debt issuance to fund specific payments. In 1957, the Treasury set precedent when it delayed payment to contractors to stay under the debt limit, and a Government Accountability Office report from 1985 notes the Treasury’s ability to prioritize payments. In 1996, the Treasury planned to forego making Social Security payments if the debt limit was not raised, so Congress provided authority to issue debt to make those payments before they increased the debt limit.

Additionally, since federal government revenues exceed interest payments, defaulting on the debt is not a necessary outcome of the debt ceiling not being raised, assuming prioritization.

PNC’s view coincides with Federal Reserve Chairman Ben Bernanke’s 2011 statement that “given the size of the deficit and the uneven time pattern of government receipts and payments, the Treasury would soon find it necessary to prioritize among and withhold critical disbursements, such as Social Security and Medicare payments and funds for the military.”  

PNC strategists believe the true risk of default remains “extremely low” and predict real gross domestic product growth for the U.S. will remain above 2 percent in the second half of 2013.

The cost to insure against U.S. debt default has risen but also has remained below 2009 and 2010 peak levels, and the yield on the 10-year Treasury is not far above three month lows, at 2.6 percent compared to 2.4 percent in early July, the report said.

Their prediction is that negotiation over raising the debt ceiling will drag on to the last minute, and the final resolution of the Continuing Resolution that led to the government’s shutdown may be combined with a deal to raise the debt ceiling. 

Other analysts also believe that Congress and President Obama will come to terms soon on a debt-ceiling deal.

"We think they'll ... reach a last-minute agreement to raise the debt ceiling later this month, avoiding more severe consequences," said Kate Warne, investment strategist with Edward D. Jones & Co., L.P. "In the meantime, you'll need patience, discipline and common sense to keep these policy dramas in perspective and continue with your life and long-term financial strategy as usual."