Default by U.S. Can Be Avoided Until September, Silvia SaysJillian Berman and Betty Liu
The U.S. government can avoid a default for at least a month after the Aug. 2 deadline to lift the debt ceiling set by the Treasury Department, said John Silvia, chief economist at Wells Fargo Securities LLC.
“The Federal Reserve and the Treasury can work together to generate enough cash probably for the next two or three months to avoid any kind of automatic default on the Treasury debt,” Silvia, who is based in Charlotte, North Carolina, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “There’s a way of getting around this issue for at least another month or two.”
Political party leaders are preparing dueling plans for raising the U.S. debt ceiling, unable to break a partisan stalemate over how to tackle the nation’s $14.3 trillion debt by Aug. 2. That is the date when the Treasury Department says its borrowing authority will end.
Greater-than-forecast tax revenue might give the Treasury until Aug. 10 before it runs out of cash, Barclays Capital said in a report last week.
“Tax-receipt inflows from July 14 to date have been considerably stronger than we were expecting,” New York-based Barclays analysts, including Ajay Rajadhyaksha, said.
Inflows over the five-day period from July 14 were about $14 billion higher than Barclays had foreseen, and outlays were about $1 billion less, according to the report.
House Speaker John Boehner, an Ohio Republican, told party members he plans to force action on a two-step debt-limit extension that would provide a $1 trillion, shorter term increase than President Barack Obama has requested, defying a veto threat.
Harry Reid, the Senate’s top Democrat, prepared his own proposal, which would hand Obama the full $2.4 trillion in additional borrowing authority he has requested -- enough to last through the 2012 elections -- tied to a $2.7 trillion package of spending cuts, according to a Senate Democratic aide.
“It’s very unlikely that we’re going to default,” Silvia said. The Treasury already has “cash flow that’s available” to last two weeks after Aug. 2, before resorting to any special measures.
Even if the two parties fail to reach an agreement to raise the debt ceiling in time, officials will still be able to stave off a default for at least a month, Silvia said. Bond investors have realized they will probably still get paid in the event the impasse goes past the deadline.
Regarding entitlement programs like Social Security and Medicare, Silvia said, “there’s probably enough cash to make those payments as well.”
“It really comes down to who’s third or fourth in line and it’s the federal government contractors and some federal government employees that may have some temporary furloughs,” he said.
Treasury 30-year yields increased five basis points, or 0.05 percentage point, to 4.31 percent at 3:19 p.m. in New York, according to Bloomberg Bond Trader prices. They touched 4.34 percent, the highest level since July 8.
The Federal Reserve may have the legal authority to extend a line of credit to the Treasury, said Sung Won Sohn, an economics professor at California State University-Channel Islands. He said any such credit line would range from $10 billion to $30 billion -- enough to tide the government over for a few days.
Michael Feroli, chief U.S. economist for JPMorgan Chase & Co., said a Fed contingency plan could allow banks and other financial institutions to temporarily lend their Treasury securities to the Fed in exchange for cash. Such a move would be aimed at easing any credit strains caused by a default, he said.
“In general, I think they’d want to temporarily substitute the Fed’s credit in place of the Treasury’s credit,” Feroli said.
Silvia cautioned that there is still a risk that the U.S. will lose its AAA debt rating.
“OK you’ve got a deal, the debt ceiling’s raised -- that’s not the issue,” he said. “The issue is what are the details behind that, that alter the long-term trend in terms of federal spending and the deficit, and that’s what the credit agencies are talking about.”
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