Closing In On The 'X Date'
Summary
- Ongoing meetings continue between Congressional leaders and President Biden to resolve the debt issue before the Treasury runs its cash balance to zero.
- Several unconventional measures could avert technical default although none has strong, if any, historical precedent.
- The Treasury does appear to have the ability to prioritize payments, and principal and interest payments on the debt would be first in line.
TERADAT SANTIVIVUT
By Joseph Purtell
As technical default nears, Congressional leaders and the President continue to negotiate.
While our base case continues to be that the U.S. Congress will reach a resolution on the national debt ceiling before the government hits technical default (the "X date"), the risks of partial resolution - or no resolution at all - have increased. Ongoing meetings continue between Congressional leaders and President Biden to resolve the debt issue before the Treasury runs its cash balance to zero. Treasury Secretary Janet Yellen estimates this date to be June 1, and while the Treasury may not literally have zero cash on that date, it will likely be below a minimum comfortable balance. Should the Treasury be able to make it to the corporate tax payment deadline of June 15, the X date would likely push out to late July.
The conventional and most straightforward way to resolve the current debt ceiling showdown would be for Congress to pass a bill that raises or suspends the debt limit, either involving deficit reduction measures or in a "clean" format. Other options include a purposefully small increase or suspension until a later date, for instance, the end of September, to allow more time for debate and align with an appropriations bill.
Several unconventional measures could avert technical default although none has strong, if any, historical precedent. For example, Biden could invoke a clause in the 14th Amendment which, assuming it could withstand the inevitable barrage of legal challenges, could grant him the authority to effectively ignore the debt limit and instruct the Treasury to continue operating normally. On the Treasury side, minting a $1 trillion coin (the Fed would have to agree to the scheme) or issuing premium or "consol" (perpetual) bonds are options, none of which Yellen has shown any willingness to use.
Despite its continued insistence to the contrary, the Treasury does appear to have the ability to prioritize payments (based on public transcripts of FOMC meetings during prior debt ceiling showdowns), and principal and interest payments on the debt would be first in line. Should funds be insufficient to cover those payments, guidance from the Securities Industry and Financial Markets Association (SIFMA) and the Treasury Markets Practice Group (TMPG) suggests to us that the operational maturity date of maturing CUSIPs can be extended each day in Fedwire to allow for continued booking and delivery until the Treasury has sufficient cash to make payments. Congress could authorize compensation for delays in redemption payments, but this is not automatic. Additionally, the Fed could accept as collateral, purchase, or swap unpaid CUSIPs, but may be hesitant about larger interventions.
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