CQ TODAY ONLINE NEWS
July 27, 2011 – 11:23 p.m.
‘D-Day’ May Not Mean Default, But It Does Mean Deadline
By John Cranford, CQ Staff
Just how firm is the federal government’s Aug. 2 default deadline?
Some lawmakers and news accounts have suggested it may be squishier than the Obama administration is making it out to be, saying the government will not really run out of money next week.
But market analysts who get paid to understand these things generally agree with both the Treasury and the White House that the deadline is firm. “People keep looking for off-ramps. They don’t exist,” White House Press Secretary Jay Carney told reporters Wednesday.
An explanation for the differing interpretations may be found in one analyst assessment.
“Saying that the Treasury will exhaust its borrowing authority is different from saying that it is out of cash,” said Wrightson ICAP, the New Jersey-based bond market research firm, in a Wednesday statement. The government, Wrightson said, has said only that the Treasury will at some point be unable to pay all of its bills once it runs out of the ability to raise new cash.
“That is undoubtedly true but doesn’t mean that checks will start to bounce as soon as next week,” the research firm said.
The first indications that Treasury is up against a wall may come in the form of obscure market communications regarding upcoming debt sales. On Thursday morning, the Treasury Department is scheduled to announce a sale of three-month and six-month securities that will settle Aug. 4. If there will be a cash-flow problem with those, it may be telegraphed in the announcement, Wrightson said.
Or, it could come Friday, when Treasury will list securities that will be available for sale in coming weeks as part of a regular quarterly auction.
These announcements are important because borrowing requires planning by the government and the banks and other investors who buy Treasury securities. That planning requires certainty about the government’s borrowing authority.
The details of the coming quarterly auction will be announced Aug. 3, and are likely to involve tens of billions of dollars in debt sales for the following week. The last such auction, in May, totaled $72 billion, all of which was subject to the debt limit. If there is no debt limit increase in time, Treasury may announce that the quarterly sale is conditional — or postpone it.
Most analysts who question whether Aug. 2 is a drop-dead date are watching the income and expense flows of the government and estimating that perhaps tax receipts have been higher and outlays lower than expected, giving Treasury Secretary
Regular readers of the Treasury’s daily tax and loan report know there is cash in the till — actually on deposit with the Federal Reserve Bank of New York. As of the close of business Tuesday, Treasury had just a hair under $82 billion in the bank. But that money is already spoken for to cover routine costs and to maintain a cushion.
Also, the total amount of borrowing subject to the debt limit was a bare $25 million short of the ceiling, leaving essentially no room to borrow more.
‘D-Day’ May Not Mean Default, But It Does Mean Deadline
Any business operator would quickly understand just by looking at the Treasury’s books that it is operating under a tight cash-flow cap, even if it is measured in the billions.
Treasury “will have more than enough cash on hand to cover its normal outlays for the first week of the month,” Wrightson wrote. After that, “there is a lot of uncertainty” in the projections.