Global Daily – The clock is ticking…once again

by: Georgette Boele , Peter de Bruin

140211-Global-Daily-Insight.pdf ()
  • While having remained under the radar screen, the debt ceiling discussion is likely to resurface again
  • Indeed, the Treasury Department has, once again, been forced to rely on extra ordinary measures,…
  • …which should give it breathing space until the end of this month
  • Given the more constructive mood in Washington, the debt ceiling should be raised before this time

The clock is ticking once again…

Although the debt ceiling debate has remained relatively under the radar so far, the clock is ticking once again. This is because with the recent budget deal, Congress passed a temporary suspension of the debt ceiling that lasted only through February 7. As a result, the Treasury has been forced to rely again on – so called – extra ordinary measures, which in essence are complicated accounting tricks that delay the moment that debt levels reach the debt limit. Unlike the previous debt ceiling debate, the Bipartisan Policy Centre (BPC) expects that these extra ordinary measures will give the Treasury a much shorter period of breathing space. This is because, historically, the month of February has a high deficit due to the start of the tax filing season, with the situation being exacerbated due to delays related to the government shutdown. In addition, income tax refunds need to be paid. As such, BPC expects that the Treasury’s extra ordinary measures will be exhausted by the end of this month. After this date, the Treasury would still have some cash at hand, while it could also use tax revenues, but it would become increasingly likely that the Treasury could no longer meet all of its obligations. Indeed, BPC projects that this could happen already around March 14. If the situation were to drag on for even longer, this could ultimately cause the US to default on its debt.

…but the mood in Washington seems to be more positive

That said, we think that this time the debt ceiling discussion will be less tense than before, though we would be surprised to see an imminent solution. That is because the Republicans do not seem to want to push the negotiations as far as during previous rounds of debt ceiling discussions. Indeed, although House Speaker John Boehner was still looking for a solution, he clearly stated that he did not want the US to default on its debt during a recent press conference. And some Republicans – like the Democrats – even want to go for a ‘clean’ debt limit extension (i.e. an increase in the debt ceiling with no strings attached). Still, a number of alternatives have been mentioned as well. Some Republicans want to link raising the debt ceiling to a restoration of recently cut military benefits, while others seem to favour making changes how doctors are reimbursed for Medicare treatments. A final idea that emerged over the weekend would link raising the debt ceiling to a combination of the military and Medicare issues, while finding offsetting measures by prolonging the automatic spending cuts and changes to pension programmes. Importantly, all of these options involve relatively small amounts of money, underlying that the debt ceiling debate will not likely reach the heated temperatures that we saw last year. That said, the House of Representatives will adjourn Wednesday and will not return to work until February 26. This is close to the moment that the Treasury will exhaust its extra ordinary measures. In the past, this moment has always been treated by Congress as a hard deadline. So, while there is a small chance of an earlier resolution, most likely – as during previous debates – the debt ceiling will be raised at the very last moment.


Financial markets appear to be calm

Financial markets have been focussed on emerging markets, US economic data and the Fed tapering. However, below the surface the debt ceiling debate has led to a modest deterioration in the overall sentiment as well. This has been reflected in the 1-month TED spread moving lower, which is a reflection that US Treasury bills are losing some attractiveness compared to 1-month US Libor. Moreover, price volatility for US government securities, US sovereign CDS spreads and the gold price have risen slightly, but remain at relatively low levels. All-in-all financial markets are not yet worried, but some investors have taken precautions.