U.S. May Have Enough Cash to Delay Aug. 2 Deadline for Default
The U.S. Treasury Department may have enough cash to pay the government’s bills for days or even weeks if Congress fails to raise the debt limit before an Aug. 2 deadline, say analysts at UBS AG (UBSN) and Barclays Capital.
The date set by the Treasury is a projection for when the U.S. exhausts its authority to borrow, not when it runs out of money. Chris Ahrens at UBS and Ajay Rajadhyaksha at Barclays say the debt limit may not have to be raised next week, in part because tax revenue is coming in higher than forecast.
“Having borrowing authority is like having a credit card,” Rajadhyaksha said in an e-mail yesterday. While the Treasury “will no longer be able to use its credit card” after Aug. 2, “it should still be able to pay its bills on Aug. 3, which is ultimately what matters most.”
The extra cash may help the nation stave off a default and buy time for politicians to hammer out a deficit-reduction agreement, Rajadhyaksha said. U.S. stocks fell and Treasury 30-year yields touched a two-week high yesterday as Republicans and Democrats failed to reach a deal to increase the $14.3 trillion federal borrowing limit, boosting the chance the country’s top credit rating will be cut.
The Treasury “has another two weeks after Aug. 2 basically of cash flow that’s available, and they will pay off the interest on the debt as their No. 1 priority to avoid any default,” John Silvia, chief economist at Wells Fargo Securities LLC Silvia, said in an interview on Bloomberg Television yesterday.
The Obama administration and Republican lawmakers have been engaged in daily talks aimed at raising the debt ceiling and reducing the deficit.
A two-step plan by House Speaker John Boehner would raise the borrowing limit by up to $1 trillion and later by about $1.6 trillion while requiring larger spending cuts, according to Republican aides. A competing proposal by Senate Majority Leader Harry Reid would cut $2.7 trillion in spending and give President Barack Obama the full $2.4 trillion in additional borrowing authority he seeks, enough to get through the 2012 elections.
“We don’t think there will be a default,” Ahrens, head of U.S. rates strategy for UBS in Stamford, Connecticut, said yesterday in a telephone interview. He estimates the Treasury has enough cash to make all payments until Aug. 8-10.
Rajadhyaksha and fellow New York-based Barclays analysts said in a report last week that tax receipts for the five days from July 14 were about $14 billion higher than Barclays had predicted, and outlays were about $1 billion less.
Few More Days
“Ultimately, the debt ceiling will have to be raised, but policy makers might have a few more days than they initially thought,” Rajadhyaksha said yesterday.
Treasury spokeswoman Colleen Murray declined to comment on the projections.
Treasury Secretary Timothy F. Geithner told CNBC on July 18 that the deadline for when the U.S. exhausts its borrowing authority “absolutely” remains Aug. 2.
“We will do everything we can to mitigate the damage,” he said on the “Fox News Sunday” program on July 24. “We do not have the ability, only Congress has the ability, to make sure that people get their payments on time.”
Thirty-year bond yields increased six basis points, or 0.06 percentage point, to 4.32 percent at 5:16 p.m. yesterday in New York, according to Bloomberg Bond Trader prices. They touched 4.34 percent, the highest level since July 8. The Standard & Poor’s 500 Index fell 0.6 percent to 1,337.43 after slumping as much as 1 percent.
The Treasury reduced the size of its auction of four-week bills for the first time since May to gain more flexibility as the deadline approaches.
Even if the Treasury’s coffers were to run dry, it could work with the Fed “to generate enough cash probably for the next two to three months to avoid any kind of automatic default,” said Wells Fargo’s Silvia, who is based in Charlotte, North Carolina.
Fed officials aren’t providing details about what steps, if any, they would take if Congress and Obama fail to reach a deal by Aug. 2.
“Of course, we’ve looked at it and thought about making preparations and so on,” Fed Chairman Ben S. Bernanke said at a July 13 congressional hearing, without elaborating.
He said a default would be a “a major crisis” that would “throw shock waves through the entire global financial system.”
At another hearing the next day, Bernanke said he wanted to “eliminate any expectation that the Fed through any mechanism could offset the impact of a default on the government debt.”
Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York, said the Fed might try to ease any credit strains caused by a default by allowing banks and other financial firms to temporarily lend their Treasury securities to the Fed in exchange for cash.
Feroli said the Fed could also lower the interest rate banks pay to borrow directly from the central bank through the so-called discount window, now 0.75 percent. U.S. Treasury securities can be pledged as collateral for those Fed loans.
For financial companies other than banks, the Fed could create a program that would allow them to temporarily exchange Treasury securities for short-term loans, Feroli said.
“In general, I think they’d want to temporarily substitute the Fed’s credit in place of the Treasury’s credit,” said Feroli, a former Fed researcher.
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