Debt ceiling: Deadline to default?
By Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist
Summary:
¦ On Thursday, the Treasury estimates that it will have approximately $30 billion in its account with the Federal Reserve (Fed), and it will need to pay bills from its cash on hand.
¦ I think the chance of a default is pretty close to zero.
¦ Unless it gets rid of the debt limit, any deal that is crafted will set us up to see a repeat of this crisis at whatever the next deadline is.
Contrary to what the headlines might have you believe, October 17 is not the deadline to default. It is the day that the U.S. Treasury says it will exhaust the extraordinary measures that have allowed it to get by—since May 19—without breaching the legally imposed limit on federal government borrowing.
On Thursday, the Treasury estimates that it will have approximately $30 billion in its account with the Fed and it will need to pay bills from its cash on hand. However, the Treasury will still collect revenue and it will be able to roll over existing debt at Treasury auctions. Based on cash-flow projections, the Treasury should be able to meet obligations as they come due for about another week. Whether it has enough cash to pay $6 billion in interest to creditors on October 31 is questionable. It is almost certain that its cash on hand won’t cover the November 1 payment that will be due to Social Security recipients, military personnel, and Medicare service providers.
The partial government shutdown may be helping the Treasury’s cash-flow picture slightly but not enough to buy a lot more time. But even if October 17 comes and goes without a deal to raise the debt ceiling, all hope for a resolution may not be lost. The Treasury has a window of about a week during which a deal can be struck before it needs to issue more debt than it already has.
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