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Two Months And Counting To The Real Debt Ceiling D-Day
08-30-2013, 02:32 AM,
Two Months And Counting To The Real Debt Ceiling D-Day
Two Months And Counting To The Real Debt Ceiling D-Day

There has been much confusion in the past several months relating to the US
debt ceiling, and specifically the fact that total debt subject to the limit has
been at just $25 million away from the full limit since late May.

As we explained first
in January 2011, there is nothing sinister about this. Any time the Treasury
hits its physical debt cap, it activates its available "emergency measures"
which include such money releasing options as disinvesting the Civil Service
Fund, Suspending reinvestment in the G-Fund, Selling securities from the
Exchange Stabilization Fund, and others, which cumulatively free up around
$300-$350 billion. In essence the "emergency measures" act like a revolving
credit facility that is slowly but surely being drawn down. Add to that sporadic
cash creation over the past few months from cash inflows from the GSEs and one
can see why the US has been able to be in breach of the debt ceiling for as long
as it has. And why it still has just under two months of capacity.

The chart below shows how much emergency capacity the US has currently when
adding all the emergency benefits, and how much it will have over the next three
months. Of note is the period between October 15 and November 1, when tifrst the
"revolver" cash balance dips below $50 billion, and then hits $0 by November 1.
Either way, there better be a debt deal by mid-October, or late October at the
very latest, or the summer of 2011 debt ceiling fiasco will seem like a walk in
the park in comparison to what's coming.


For all other debt-ceiling related questions, we present Goldman's take.

Q: What did Treasury announce earlier this week?

Treasury Secretary Jack Lew informed Congress on August 26 that the Treasury
would exhaust its borrowing capacity by the "middle of October." Specifically,
this is when the Treasury has determined that it will have used the last of the
"extraordinary measures" it has been employing to temporarily lower debt held in
internal trust funds in order to make room under the debt limit for marketable
Treasury issuance. Once those accounting strategies are no longer available, the
Treasury will be left to rely on incoming tax receipts and the cash balance on
hand to finance any disbursements.

The Treasury projects its cash balance to be roughly $50bn in mid-October
when it exhausts its borrowing authority. This is a greater level of detail than
the Treasury has provided ahead of previous debt limit deadlines. Prior
announcements never stated the precise cash level the Treasury expected to have
around the deadline, and thus left some uncertainty about whether payments
scheduled to be made in the days following the deadline were truly at risk. For
example, the Treasury announced in 2011 that it expected to exhaust its
borrowing authority by August 2 of that year. Deficits turned out to be slightly
lower than anticipated in the weeks leading up to the deadline, leaving the
Treasury with $54bn in cash on hand at the deadline, which could have allowed
the Treasury to operate without additional borrowing for at least another week.

Q: How does that compare with our forecast?

We had previously projected that Congress would need to raise the debt limit
before November 1, give or take a week or two. However, although the deadline we
projected differs from the Treasury's "middle of October", it is the definition
of the deadline that differs rather than our view of projected Treasury cash
flows. Our latest projection implies that the Treasury's total financing
capacity--i.e., the headroom under the debt limit plus the cash balance--will
drop below $50bn in mid-October, similar to the Treasury's projection (Exhibit
1). Based on the pattern of daily receipts and outlays that we project (we base
these on prior years' patterns scaled to current levels and adjusted for
calendar differences), we expect that the roughly $50bn cash balance that the
Treasury will have in mid-October will gradually shrink over the following two
weeks. The Treasury would probably be able scheduled payments in late October
with the cash we expect it to still have on hand, but it would be unable to make
all of the payments scheduled for November 1.

Q: So what is the real deadline?

To avoid disruptions to the Treasury market, Congress will probably need to
raise the deadline by mid-October, as the Treasury states. Since the Treasury
plans its securities issuance with the expectation of a sizeable cash
cushion--the cash balance has averaged around $60bn over the last couple of
years--it should be expected that the debt limit, net of extraordinary measures,
would be reached before the point that the Treasury is unable to pay its
obligations as they come due. The upshot is that Treasury's regularly scheduled
auctions could be scaled back or delayed if Congress doesn't raise the debt
limit by Treasury's stated deadline, even though scheduled payments might not be
immediately at risk.

The Treasury is scheduled to hold auctions of 3- and 10-year notes and
30-year bonds the week of October 6 that are scheduled to settle October 15. The
Treasury's projection that it will exhaust its "extraordinary measures" by
mid-October seems reasonable if one assumes that Treasury auctions continue on
schedule in amounts similar to what is implied by the Treasury's most recent
issuance projections. Assuming those projections are accurate, the Treasury
might not be able to conduct those auctions as planned without a high degree of
confidence that the limit would be raised by the time the securities settle on
October 15.
This would be highly unusual but not unprecedented. A Government
Accountability Office (GAO) report lists 17 Treasury auctions between 1995 and
2006 that for which the announcement date was delayed; in 11 of those cases the
auction itself was delayed. Most of these involved short delays to bill
auctions, but during the 1995 debt limit debate the Treasury postponed 3-year
and 10-year auctions for roughly one week.

Q: How does the Treasury's announcement affect the upcoming fiscal

The announced deadline probably shifts attention further toward the debt
limit and away from the debate over extending government spending authority.
Current spending authority expires at the end of the fiscal year on September
30. While that issue could still be dealt with separately from the debt limit, a
mid-October deadline increases the likelihood that they will be rolled up into
one debate given their proximity on the calendar (perhaps involving a short
extension of spending authority to more closely line up the deadlines). The
practical consequences of this are not that great, however. Republican leaders
have not appeared enthusiastic about strategies to block the renewal of spending
authority unless changes to the Affordable Care Act (also known as "Obamacare")
are made, and had already appeared to be more focused on negotiating around the
debt limit even before the Treasury's announcement.

The detail the Treasury has provided regarding its cash balance may also lead
some lawmakers to believe they have more time to raise the limit than they
really do. As noted earlier, the Treasury's mid-October deadline is analogous to
the August 2 deadline from 2011. The Treasury still had a significant cash
balance it could use to make scheduled payments, but due to normal scheduled
Treasury issuance it had exhausted its capacity to borrow under the limit. In
the 2011 episode, lawmakers had little doubt that they needed to raise the debt
limit by the deadline. This was, among other things, due to the perceived risk
that the Treasury could miss an important scheduled payment, which seemed quite
possible without knowledge of how much cash the Treasury expected to have on
hand. If lawmakers feel confident that payments scheduled for the days following
the mid-October deadline are likely to be made on schedule, they may feel less
pressure to enact an increase by that point and could conceivably wait until
later in the month. (Complicating matters further, Congress is scheduled to be
on recess October 14-19.) Given this risk, it seems likely to us that the
Treasury will make clear to Congress in upcoming communications that while it
may have some remaining cash on hand to pay obligations after the mid-October
deadline, waiting until late October would nevertheless be disruptive and should
be avoided.


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