Although it’s far too early for equity benchmarks to care about “trivial” matters like a technical US default later this year, those inclined to hand-wringing have variously suggested this time might be different when it comes to the debt ceiling.
In polite company, you’re supposed to employ euphemisms in this discussion. You might say, for example, that internecine partisan politics materially raise the odds of an accident that could have serious, if short-lived, consequences for markets and the economy.
If you’re not constrained in your capacity to speak plainly, you might instead suggest that the right-most flank of the Republican party has demonstrated beyond a shadow of a doubt that matters of existential concern to the integrity of the nation are no concern of theirs depending on the circumstances. (Even that’s a bit euphemistic, now that I read it back to myself.)
So, what if? What if Treasury runs out of resources prior to an agreement on raising the ceiling? What happens then? Well, nothing good, probably. Goldman’s Alec Phillips ran through the specifics.
“Payments would stop but Treasury interest payments would likely continue, as would redemption of maturing securities,” he wrote, in a lengthy note outlining various scenarios and otherwise elaborating on the relevant issues and math.
He cited FOMC transcripts from 2011 and 2013, which included contingency planning. There were three principles:
- Principal and interest payments on Treasury securities would continue to be made on time,
- The Treasury would decide each day whether to make or delay other government payments, and
- Any payments made would settle as usual.
Phillips said that in Goldman’s view, sticking to that plan would be “a logistical challenge” this time around. Last year, during the same window the bank sees Janet Yellen running out of options, outflows exceeded inflows “on most days.”
From July 15 through August 15 of 2022, Treasury took in less than one dollar for every two it paid out. Payments will probably outrun receipts by at least $200 billion in July and August, on Goldman’s estimates.
“Even if Treasury succeeded in stopping other payments to ensure continued interest payments, the economic damage could be severe as it would mean eliminating payments worth around 10% of GDP at an annualized rate,” Phillips said.
Related:
Republicans May Have A Math Problem In Debt Ceiling Standoff
