August 2nd. The Real Deadline? accounting, political, default, tricks, raising

cmacedo

If yes, deadline for what?

If not, who is to blame for the hype?

what do you guys think?

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Credibility of Aug. 2 default deadline under fire

KEVIN CARMICHAEL - The Globe and Mail

Treasury Secretary Timothy Geithner is facing a credibility issue.

For weeks, Mr. Geithner has sought to corral the political debate over raising the debt ceiling toward a live-or-die deadline of Aug. 2 – the day he says he will run out of accounting tricks to cover all of the U.S. government’s bills. That would set the country up for default, unless it receives renewed borrowing authority.

The Obama administration has attached great urgency to Aug. 2, warning of economic calamity if legislators fail to end their impasse. Few doubt that a default by the U.S. would trigger major upheaval in capital markets and the global economy. However, many on Wall Street aren’t convinced the country will necessarily be out of cash by that deadline.

“Is August 2 really ‘August 2’?” economists at Barclays Capital in New York asked rhetorically in a research note this week that argues the Treasury has enough revenue coming in to keep it going for at least another week.

UBS Securities arrived at a similar conclusion. John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C., told Bloomberg Television that he thinks the Treasury and the Federal Reserve could co-operate to avoid default for at least a couple of months.

Some analysts say the Federal Reserve could come to the administration’s aid to avoid default. The U.S. central bank could buy the government’s gold, giving the Treasury Department enough cash to avoid default for about three months. The Fed could then sell it back to the Treasury when the crisis is over, Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington who worked at both the Fed and the Treasury, said in an interview with Reuters Insider last week. Others say the assets the Fed and Treasury absorbed during the financial crisis could be used to raise cash now.

The U.S. dollar stumbled Tuesday, falling to a record low against the Swiss franc after prime time television addresses by President Barack Obama and House Speaker John Boehner on Monday suggested Democrats and Republicans were split on how to raise the $14.3-billion (U.S.) debt limit. Yields on U.S. government debt, however, are little changed this week, showing investors don’t yet see an elevated risk of payback.

Skepticism of the Aug. 2 deadline helps explain the relatively muted reaction in financial markets to the brinksmanship going on in Washington. The overriding bet so far is that the Treasury will pay its bills on Aug. 3, either as the result of an 11th-hour political compromise or further accounting magic on the part of the Treasury.

“When even Secretary Geithner can’t scare the market into going down, then we really know the deadline is not credible,” said Daryl Jones, director of research at New Haven, Connecticut-based Hedgeye Risk Management. Andrew Busch, Chicago-based global currency and public policy analyst at BMO Nesbitt Burns, said the Aug. 2 date lacks credibility because the Treasury previously extended its deadline and could do so again.

The threat of default and downgrades by credit rating agencies did little to prod the politicians Tuesday. Their debate appeared to enter a stasis, as legislators in the House of Representatives readied for a vote Wednesday on Mr. Boehner’s proposal.

The leader of the Republican majority in the House is pushing a two-step plan that would implement about $1-trillion in spending cuts over 10 years, while lifting the debt ceiling by a similar amount. That would set up a second vote on the debt limit in 2012, to which Mr. Boehner would attach almost $2-trillion in additional reductions.

Officials in the White House have indicated the President would veto Mr. Boehner’s program, and the leaders of the Democratic majority in the Senate say they would block it.

Senate Majority Leader Harry Reid is planning legislation that would lift the debt ceiling through 2013 and narrow the deficit over the next decade by $2.7-trillion. The White House supports Mr. Reid’s initiative, and Bob Casey, a Democratic congressman from Pennsylvania, told an audience in Washington on Tuesday that he thought a “version” of Mr. Reid’s plan could win over a majority in the House.

However, Mr. Casey said it might take “a couple” of votes to achieve a compromise between the House and Senate, suggesting the legislative haggling will extend into the weekend, if not the eve of the Aug. 2 deadline.

If Barclays Capital is correct, that scenario need not be so nerve-wracking. A July analysis by economists at the investment bank was in line with the Treasury’s schedule. This week, analysts ran the numbers again and now predict that tax revenue is about $14-billion higher than their previous estimate, while government outlays have been about $1-billion lower. That should leave the Treasury with enough cash to get buy until Aug. 15 when a big debt payment is due, according to the analysis.

The administration, however, isn’t budging.

Aug. 2 “is not a guess. It’s not a political opinion,” White House spokesman Jay Carney told reporters Tuesday. “It is the judgment of career analysts at the Treasury Department. Beyond that date, we lose our capacity to borrow.”

ba736

bchadwick Wrote:
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> The elephant in the room is where the heck does
> one put cash? Money market sweeps still hold a
> lot of stuff as 90d T-bills. Will T-bills be
> paid? Is the Treasury going to single out
> specific maturities to hold off on?


I would think in the hypothetical scenario that the US defaults the choice investors are faced with boils down to holding:

1) Cash, which is effectively very short duration gov't debt with no interest
2) T bills and notes, which if defaulted on become gov't debt that *hopefully* can be expected to pay interest at some point whenever congress gets things together

As far as I know no markets other than these two are large, liquid, and safe enough to absorb the kind of liquidity we are talking about. Right? This is an assumption not necessarily a truism.

So given that choice, I would rather be holding something that *might* pay me interest eventually even if currently defaulted to something that will definitely not pay me any interest. Both credits should be the same. Dollars are obviously backed by the same entity as USTs.

Hypothetically if the government were to default and all of the sudden implied theoretical 5 year treasury yields went up to 5% or something, many people (me included) would be buying hand over fist on the assumption that even if a coupon payment or two were delayed the possibility of locking in a risk free 5% of return for the next 5 years looks pretty good right now. That would clearly knock rates back down...

I am just thinking out loud here - I run out of mental energy very quickly with the infinite feedback loops in such a bizarre situation.

Where do we disagree?

mp3bu

The elephant in the room is where the heck does one put cash? Money market sweeps still hold a lot of stuff as 90d T-bills. Will T-bills be paid? Is the Treasury going to single out specific maturities to hold off on?

sameeragarwal

@Sweep, Why would there be increase inflows to Treasuries for safety if there is a downgrade? I see a flight to cash, gold and foreign currencies like the Swiss Franc.

At the end of the day we're all speculating, granted, but personally I sold all my Treasury Bills holdings via Treasury Direct a few months ago when yields were hitting the floor and transferred this to corporate bonds.

hoangvu90

No, I believe plenty of people will panic. They'll take off their risk trades though, and, demanding safety, they'll go to Treasurys....and gold. In theory a 50/50 change of a downgrade should already be priced in to Treasurys. Doesn't seem to have hurt them yet.

Darien

@Sweep, What leads you to believe that yields would fall? So you think the markets would see a downgrade and be like "no big deal"?

willsucceed

Krugman is right; you can monetize the debt by printing money. But for obvious reasons, this is a bad idea.

@Sweep the leg, You said, "We've missed the deadline before, two or three times in recent history." Can you please provide a source? I'd like to read up on that, thanks.

jarobi04

A. It's Timmy that set the deadline, not BO or Congress.

B. We're not going to default anyway. May shut down the gov't but we won't default, not even "technically."

C. We've missed the deadline before, two or three times in recent history. It's just the 24 hour news channels that are freaking everyone out.

On a side note, anyone read Krugman's most recent Op Ed? His solution is to just print money in the amount equal to the national debt and pay it off. That way we can just start over. Awesome idea!

BC_MBA_student

What would the administration gain for saying that's Aug. 2 when they actually have more time.

A. This looks bad for Obama and Geithner if they are lying

B. This could be used politically to kick him out in the next election

But it's weird that it's not a rolling deadline as projects are not going to be exactly within line with actuals.