US Treasury Secretary Lew warned that a default would cause ‘irrevocable damage’…

by: Peter de Bruin

US Treasury Secretary Lew warned that a default would cause ‘irrevocable damage’…

In his testimony before the Senate, US Treasury Secretary Jack Lew exerted more pressure on Washington to find a quick solution, stating that a US debt default would cause ‘irrevocable damage’. Although the Treasury Secretary in his written remarks continued to say that the 17th of October would be the day that the Treasury would exhaust its borrowing capacity, in the Q&A session after the testimony, he stated that this was an estimate and that tax revenue flows could easily fluctuate by as much as $20bn per day. Even though the Treasury’s cash balance of $30bn should provide some cushion, this suggests that uncertainty in financial markets could increase meaningfully next week, if negotiations about a short-term debt ceiling increase were to break down again.

 

…while a prioritisation of payments was not possible

The Treasury Secretary then went on to say that a prioritisation of sovereign debt payments was not possible. Indeed, according to the Secretary it would be an operational nightmare to pick and choose payments, as the Treasury’s systems were designed ‘to pay bills, not to not pay bills’. In addition, a prioritisation was just a ‘default by another name’, as other parties would still not see their obligations being met, which would affect the economy and financial markets, even if sovereign debt demands were honoured. Although we think that when push comes to shove, the Treasury will make an attempt to prioritise sovereign debt payments, it is clear from the Q&A session that this will not be an easy job and that the risks of a sovereign debt default would remain high.

 

Initial jobless claims: shutdown starts to have an effect

Meanwhile, there were some signs that the shutdown is having an effect on the data. Granted, according to the Labor Department, roughly half of the 66K rise in claims to 374K in the week ending October 5 was caused by a backlog of claims created due to computer issues in California last month, but about 15K claims were related to the government shutdown. Although claims filed by furloughed workers do not show up in the figures, workers outside the federal government who are affected by the shutdown are being counted.