Wednesday, October 16, 2013 1:39:53 AM
U.S. May Not Actually Default Friday, But That Doesn't Mean Washington Has Wiggle Room
Howard Gleckman Howard Gleckman, Contributor
10/15/2013 @ 5:39PM | 9,738 views
House Speaker John Boehner (Image
credit: Getty Images via @daylife)
What’s going to happen Oct. 18 if Congress doesn’t vote to increase the debt limit? Probably nothing.
Make no mistake, Washington is still wading in exceedingly treacherous waters as the President and Congress wrestle over a deal to avoid–at least for now—a breach of the nation’s borrowing authority. The government risks financial calamity if it fails to pay its bills on time–which it inevitably will do without the ability to borrow more money. But default may not happen on Thursday, or even this week.
In a recent online discussion .. http://branch.com/b/experts-weigh-in-the-debt-ceiling-2 .. sponsored by the Urban Institute, policy experts from across the ideological spectrum agreed: If necessary, the Administration will probably find ways to put off financial catastrophe for at least an extra few days.
Oct. 18 was never really a drop-dead date in the way that Oct. 1 was the government shutdown deadline. Congress had to pass a spending bill by Oct. 1 to prevent federal agencies from furloughing workers and cease some operations.
By contrast, Oct. 18 found its way into the public debate after Treasury Secretary Jack Lew warned Congress that he expected to have only about $30 billion in cash available by then. After that, he said he could not promise to make all scheduled government payments.
The government may be about to lose borrowing authority. But that doesn’t mean it will immediately be unable to pay its bills. As a result, the exact date of actual default remains uncertain.
Government raises money by borrowing and by collecting taxes and other revenues. Even after its borrowing authority is exhausted, it will continue to collect taxes. It may also have some limited additional flexibility to shift money among accounts, although this is uncertain.
As a result, the White House may have a few days or even a couple of weeks to play with.
When exactly will the federal Treasury turn into a pumpkin? The budget experts at the Congressional Budget Office and the Bipartisan Policy Center figure the Treasury will run out of money between Oct. 22 and Nov. 1.
Why the range? It turns out the green eyeshade folks can identify projected daily spending quite precisely. They know, for instance, that Social Security must pay $12 billion in benefits on Oct. 23 and that Treasury owes $6 billion in interest on the public debt on Oct. 31. They also know the government must pay out more than $55 billion on Nov. 1.
They are less adept at projecting day-to-day revenues, which can vary quite a lot. That’s why Lew conservatively estimated that he’d be down to his last $30 billion in cash-on-hand by Thursday.
Thus, the drop-dead date may not be Oct. 18. But it will be very soon—and almost certainly before those big payments are due on Nov. 1.
This may create a serious credibility problem for President Obama. If Congress does not act in time, his critics will note with some glee that the sun still rose on Friday morning and Treasury still paid its bills. So, they’ll ask, what’s the rush?
To start, it is impossible to know how financial markets will react in coming days. Which turn of the Washington screw will set them into a panic? Who knows?
Page 2 of 2
We also run the risk that Congress and the White House will miscalculate in their game of chicken and throw the nation into default. That puts us in largely uncharted waters, though my Tax Policy Center colleague Donald Marron noted in a recent blog post that an accidental short-term default in 1979 caused a sharp spike in interest rates.
The nation may not go over the fiscal cliff at 12:01 AM on Oct. 18, but in the absence of a fiscal deal in the next day or so, we will be teetering on the edge of the precipice. And that is a dangerous place to be.
http://www.forbes.com/sites/beltway/2013/10/15/u-s-may-not-actually-default-friday-but-that-doesnt-mean-washington-has-wiggle-room/
=====
When is a default a ‘default’?
By Zachary Goldfarb,October 09, 2013
Budget expert Stan Collender sounds a dire warning about the future of the…
Republicans on Capitol Hill are circulating a memo by the credit ratings agency Moody’s that says that if Congress does not raise the debt ceiling by Oct. 17, the nation wouldn’t actually be at risk of default. That’s because the Treasury would still have plenty of revenue to pay interest to owners of U.S. government bonds.
That seems to fly in the face of what President Obama says. The president and his aides have been warning for weeks that if the nation doesn’t raise the debt ceiling, there would be a default in the weeks following — and that could shake the economy and global financial markets.
Why the discrepancy?
It partly reflects word choice — and partly reflects a different assessment of the consequences of failing to raise the debt ceiling.
Let’s start where there’s agreement. Most independent analysts say that after Oct. 17, the Treasury will be unable to borrow additional funds and thus will only have cash on hand, plus incoming tax revenue, to pay the government’s bills. Officials say it’s unclear how long that will be adequate to meet all obligations. It could be a few days or a bit longer, but almost nobody believes it will be enough past Nov. 1, when nearly $60 billion in government payments are due.
The question is what happens when the government runs out of money to pay all of its bills. And that’s where there’s disagreement over what a “default” is.
The Obama administration says that a “default” occurs whenever it can’t make any of its required payments. So if the Treasury can pay interest to lenders but not Social Security recipients, it believes it’s “defaulting” on its obligations to seniors.
Financial firms — in particular the credit rating agencies such as Standard & Poor’s and Moody’s — have a more specific definition of default. That definition is missing a payment to a creditor.
Here’s how S&P — which has been harshest on the U.S. credit rating — explained it in a report on the issue last week:
“If the debt ceiling were not raised by the mid-October date, when the stop-gap measures employed in recent months are estimated to be exhausted, the U.S. would not be able to meet all of its obligations. Should the government fail to service a debt obligation, we would lower the sovereign rating to ‘SD’ (selective default). This designation indicates that the issuer, in this case the U.S. government, had failed to meet one or more of its outstanding debt obligations.”
What’s more, anyone that relies on payments from the U.S. government may suffer if the nation can’t meet its obligation. “We may lower our ratings on obligations that depend on payments by the U.S. government,” S&P writes. “Other ratings could be affected, depending upon the severity of the impact on financial markets, the payment and settlement systems, and the real economy, in the U.S. and possibly globally. It is difficult to ascertain the impact at this time, given the unprecedented nature of this event.”
So, according to the credit rating agencies, it’s true that as long as the government debt can be serviced, the United States is unlikely to technically default on its debt. But it is still unlikely to be able to “meet all of its obligations,” as S&P writes. Because federal revenues pay for only about 70 percent of government spending, that means spending will need to be cut by about a third once the government can’t pay all its bills. And many economists say that would cause a recession.
That’s assuming — as Moody’s and others do — that the government can pay interest on the debt, which most inside and outside of government feel is sacrosanct. It’s probably true that Treasury would strive to do that. But given the uncertainty in such a scenario, there’s no guarantee that there wouldn’t be disruptions in debt servicing or the broader financial markets.
Indeed, U.S. short-term borrowing rates have already been getting expensive as investors fear dislocations in the U.S. bond market later this month.
http://articles.washingtonpost.com/2013-10-09/business/42849835_1_debt-ceiling-selective-default-credit-rating
Howard Gleckman Howard Gleckman, Contributor
10/15/2013 @ 5:39PM | 9,738 views
House Speaker John Boehner (Image
credit: Getty Images via @daylife)
What’s going to happen Oct. 18 if Congress doesn’t vote to increase the debt limit? Probably nothing.
Make no mistake, Washington is still wading in exceedingly treacherous waters as the President and Congress wrestle over a deal to avoid–at least for now—a breach of the nation’s borrowing authority. The government risks financial calamity if it fails to pay its bills on time–which it inevitably will do without the ability to borrow more money. But default may not happen on Thursday, or even this week.
In a recent online discussion .. http://branch.com/b/experts-weigh-in-the-debt-ceiling-2 .. sponsored by the Urban Institute, policy experts from across the ideological spectrum agreed: If necessary, the Administration will probably find ways to put off financial catastrophe for at least an extra few days.
Oct. 18 was never really a drop-dead date in the way that Oct. 1 was the government shutdown deadline. Congress had to pass a spending bill by Oct. 1 to prevent federal agencies from furloughing workers and cease some operations.
By contrast, Oct. 18 found its way into the public debate after Treasury Secretary Jack Lew warned Congress that he expected to have only about $30 billion in cash available by then. After that, he said he could not promise to make all scheduled government payments.
The government may be about to lose borrowing authority. But that doesn’t mean it will immediately be unable to pay its bills. As a result, the exact date of actual default remains uncertain.
Government raises money by borrowing and by collecting taxes and other revenues. Even after its borrowing authority is exhausted, it will continue to collect taxes. It may also have some limited additional flexibility to shift money among accounts, although this is uncertain.
As a result, the White House may have a few days or even a couple of weeks to play with.
When exactly will the federal Treasury turn into a pumpkin? The budget experts at the Congressional Budget Office and the Bipartisan Policy Center figure the Treasury will run out of money between Oct. 22 and Nov. 1.
Why the range? It turns out the green eyeshade folks can identify projected daily spending quite precisely. They know, for instance, that Social Security must pay $12 billion in benefits on Oct. 23 and that Treasury owes $6 billion in interest on the public debt on Oct. 31. They also know the government must pay out more than $55 billion on Nov. 1.
They are less adept at projecting day-to-day revenues, which can vary quite a lot. That’s why Lew conservatively estimated that he’d be down to his last $30 billion in cash-on-hand by Thursday.
Thus, the drop-dead date may not be Oct. 18. But it will be very soon—and almost certainly before those big payments are due on Nov. 1.
This may create a serious credibility problem for President Obama. If Congress does not act in time, his critics will note with some glee that the sun still rose on Friday morning and Treasury still paid its bills. So, they’ll ask, what’s the rush?
To start, it is impossible to know how financial markets will react in coming days. Which turn of the Washington screw will set them into a panic? Who knows?
Page 2 of 2
We also run the risk that Congress and the White House will miscalculate in their game of chicken and throw the nation into default. That puts us in largely uncharted waters, though my Tax Policy Center colleague Donald Marron noted in a recent blog post that an accidental short-term default in 1979 caused a sharp spike in interest rates.
The nation may not go over the fiscal cliff at 12:01 AM on Oct. 18, but in the absence of a fiscal deal in the next day or so, we will be teetering on the edge of the precipice. And that is a dangerous place to be.
http://www.forbes.com/sites/beltway/2013/10/15/u-s-may-not-actually-default-friday-but-that-doesnt-mean-washington-has-wiggle-room/
=====
When is a default a ‘default’?
By Zachary Goldfarb,October 09, 2013
Budget expert Stan Collender sounds a dire warning about the future of the…
Republicans on Capitol Hill are circulating a memo by the credit ratings agency Moody’s that says that if Congress does not raise the debt ceiling by Oct. 17, the nation wouldn’t actually be at risk of default. That’s because the Treasury would still have plenty of revenue to pay interest to owners of U.S. government bonds.
That seems to fly in the face of what President Obama says. The president and his aides have been warning for weeks that if the nation doesn’t raise the debt ceiling, there would be a default in the weeks following — and that could shake the economy and global financial markets.
Why the discrepancy?
It partly reflects word choice — and partly reflects a different assessment of the consequences of failing to raise the debt ceiling.
Let’s start where there’s agreement. Most independent analysts say that after Oct. 17, the Treasury will be unable to borrow additional funds and thus will only have cash on hand, plus incoming tax revenue, to pay the government’s bills. Officials say it’s unclear how long that will be adequate to meet all obligations. It could be a few days or a bit longer, but almost nobody believes it will be enough past Nov. 1, when nearly $60 billion in government payments are due.
The question is what happens when the government runs out of money to pay all of its bills. And that’s where there’s disagreement over what a “default” is.
The Obama administration says that a “default” occurs whenever it can’t make any of its required payments. So if the Treasury can pay interest to lenders but not Social Security recipients, it believes it’s “defaulting” on its obligations to seniors.
Financial firms — in particular the credit rating agencies such as Standard & Poor’s and Moody’s — have a more specific definition of default. That definition is missing a payment to a creditor.
Here’s how S&P — which has been harshest on the U.S. credit rating — explained it in a report on the issue last week:
“If the debt ceiling were not raised by the mid-October date, when the stop-gap measures employed in recent months are estimated to be exhausted, the U.S. would not be able to meet all of its obligations. Should the government fail to service a debt obligation, we would lower the sovereign rating to ‘SD’ (selective default). This designation indicates that the issuer, in this case the U.S. government, had failed to meet one or more of its outstanding debt obligations.”
What’s more, anyone that relies on payments from the U.S. government may suffer if the nation can’t meet its obligation. “We may lower our ratings on obligations that depend on payments by the U.S. government,” S&P writes. “Other ratings could be affected, depending upon the severity of the impact on financial markets, the payment and settlement systems, and the real economy, in the U.S. and possibly globally. It is difficult to ascertain the impact at this time, given the unprecedented nature of this event.”
So, according to the credit rating agencies, it’s true that as long as the government debt can be serviced, the United States is unlikely to technically default on its debt. But it is still unlikely to be able to “meet all of its obligations,” as S&P writes. Because federal revenues pay for only about 70 percent of government spending, that means spending will need to be cut by about a third once the government can’t pay all its bills. And many economists say that would cause a recession.
That’s assuming — as Moody’s and others do — that the government can pay interest on the debt, which most inside and outside of government feel is sacrosanct. It’s probably true that Treasury would strive to do that. But given the uncertainty in such a scenario, there’s no guarantee that there wouldn’t be disruptions in debt servicing or the broader financial markets.
Indeed, U.S. short-term borrowing rates have already been getting expensive as investors fear dislocations in the U.S. bond market later this month.
http://articles.washingtonpost.com/2013-10-09/business/42849835_1_debt-ceiling-selective-default-credit-rating
It was Plato who said, “He, O men, is the wisest, who like Socrates, knows that his wisdom is in truth worth nothing”
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