The U.S. Congress may have scope to extend debt-limit negotiations for weeks past the mid-October date when Treasury Secretary Jacob J. Lew has said the nation will exhaust its borrowing authority, according to analysts at Credit Suisse Group AG and Jefferies LLC.
Lew urged lawmakers last week to raise the $16.7 trillion ceiling by the middle of next month, and said if they don’t the Treasury would be forced to use about $50 billion in cash to fund the government. Wall Street firms are trying to pinpoint when the Treasury’s money runs out: Jefferies predicts sufficient funds through the end of October, while Credit Suisse sees enough cash until as late as mid-November.
A delay past Lew’s timetable threatens to disrupt the world’s deepest debt market by postponing or reducing Treasury auctions, according to Goldman Sachs Group Inc. Lew’s estimate reflects his concern that lawmakers will repeat delays two years ago that led to the first downgrade of the U.S.’s credit rating, analysts said.
“It’s important for Treasury to have some kind of a deadline because Congress tends to work better when they come up against a deadline,” Ira Jersey, an interest-rate strategist in New York at Credit Suisse, one of the 21 primary dealers of U.S. government securities that trade with the Federal Reserve, said of Lew’s Aug. 26 letter to lawmakers.
The market for U.S. government debt has yet to react to any potential impasse over raising the borrowing ceiling. Treasuries that mature on Oct. 15 yield 0.023 percent, compared with 0.032 percent two weeks earlier. Yields on debt due Nov. 7 were little changed at 0.015 percent.
That wasn’t so in August 2011 as Congress pushed deliberations over raising the debt limit to the deadline set by the Treasury.
Credit-default swaps tied to U.S. Treasury debt, which provide insurance against a default and typically rise in cost as investors’ perceptions of creditworthiness deteriorate, rose to 64 basis points in July 2011, the highest since 2009. The contracts were priced at about 22 basis points on Sept. 3, according to data provider CMA.
Investors have become inured to Washington politicians waiting until the last minute to reach a compromise, said Thomas Simons, a government-debt economist at Jefferies in New York. The primary dealer projects the Treasury will be able to pay its bills until Nov. 1.
“We’ve had this understanding that things will get done, but things will take time,” Simons said. In 2011, Congress learned “how toxic it was for the markets.”
The political atmosphere remains contentious. Senator Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, is “tremendously disappointed” in the Treasury’s deliberations with Congress and its “vague letters,” his spokeswoman, Julia Lawless, said in an interview. Hatch “hopes that will change and that Treasury officials will be more open and transparent,” she said.
Treasury spokeswoman Brandi Hoffine said in an e-mail that department officials briefed Hatch’s staff this week on the need for Congress to raise the debt limit “in a timely manner and look forward to having more conversations.”
Jefferies’ projections on when the U.S. will run out of cash are based on tax receipts and historical accounting patterns to assess seasonality, Simons said. The bank refers to documents including the Daily Treasury Statement, which shows U.S. deposits and withdrawals of operating cash on everything from federal salaries to deposits from the Postal Service.
The $50 billion Lew projects will be left in mid-October could last until about the end of that month, said Omair Sharif, a U.S. economist at RBS Securities Inc. in Stamford, Connecticut. He said the Treasury’s cash projections are “pretty spot on.”
The U.S. will probably run out of cash at the end of October, according to an Aug. 29 Goldman Sachs report, which said failure to raise the debt limit might cause “unnecessary market disruption.” The “absolute drop-dead” date the Treasury runs out of money is Nov. 14 or earlier, Credit Suisse’s Jersey said.
Hoffine referred questions about such projections to Lew’s letter to Congress, which said it is “not possible for us to estimate with any precision the date on which Treasury would exhaust its cash in this situation. The rate at which cash will be drawn down depends on facts that are inherently variable and irregular.”
His predecessor, Timothy F. Geithner, used specific dates that became fodder for critics when the projections changed. Former Alaska Governor Sarah Palin accused Geithner of giving “different due dates” for a catastrophe and said “I don’t believe it,” according to a Washington Post report in June 2011.
Lew “saw what happened when Tim gave a date,” said Steve Bell, senior director of economic policy at the Bipartisan Policy Center in Washington. It’s unlikely the Treasury will be able to pay its bills any later than early November without an increase, he said.
When Congress does raise the debt limit, “it’ll be as graceful as stumbling over a rock. It won’t be New York City Ballet,” said Bell, a Republican and former chief of staff for the Senate Budget Committee from 1981 through 1986.
The U.S. was stripped of its AAA ranking by Standard & Poor’s in August 2011, a move that partly reflected the impasse over raising the debt limit as well as the government’s lack of a plan to rein in its debt load. The U.S. had demonstrated a weakening “effectiveness, stability, and predictability of American policy making and political institutions,” S&P said.
While the downgrade didn’t result in investors charging the U.S. more to borrow, as yields slipped to a record 1.38 percent in July 2012, the move contributed to a global stock-market rout that erased about $6 trillion in value from July 26 to Aug. 12, 2011.
Fitch Ratings, which has a negative outlook on the U.S.’s AAA credit grade, has said it’s considering political wrangling over the debt limit in its review of the U.S. rating. Moody’s Investors Service in July affirmed its top Aaa grade on the U.S.
Policy makers, consumed in 2011 with debating ways to reduce the U.S.’s $1.3 trillion budget deficit, now have a stronger fiscal position. The shortfall was projected to shrink to about $642 billion this year and may decline to $378 billion in 2015 before increasing again, according to the Congressional Budget Office.
The limit on U.S. federal debt originated with the Second Liberty Bond Act of 1917, which was used to help fund World War I, according to the Congressional Research Service. While the cap never caused a default, “it has at times caused great inconvenience and has added uncertainty” to the Treasury operations, the service said in a 2010 report.
Lawmakers have increased the threshold 78 times since 1960, according to the Treasury website.
“The Congress ought to get serious,” Alice Rivlin, a senior fellow at the Brookings Institution and former Fed vice chairman, said in a radio interview this week with Tom Keene and Sara Eisen on “Bloomberg Surveillance.” “They need to raise the debt ceiling so we don’t have this ridiculous counterproductive argument again.”