The group has worked with financial infrastructure providers including Fedwire and FICC to try to devise some sort of playbook. For now, there are two possible scenarios:. If the Treasury Department knows that it will miss a payment, it would ideally announce that at least a day in advance. That would allow the maturity dates of the bonds in question to be changed: a Monday maturity date would be changed to Tuesday, a Tuesday maturity would be changed to Wednesday, and so on.
These revisions would happen day by day. While that sounds relatively orderly, it still leaves many unknowns. For one thing, it could bifurcate the market for Treasury bonds and bills into those that are clearing normally and those whose maturity dates are being massaged, SIFMA told MarketWatch.
That means a great deal of uncertainty around pricing and what it means for all the downstream securities pegged to Treasury rates.
In a second scenario, which SIFMA said would be very remote, Treasury cannot, or does not, give any advance warning of a failure to make a payment, and it just happens. With the U. Some opponents of raising the debt limit argue that Washington could avoid defaulting by using incoming tax revenue to cover interest payments on U.
There are at least two problems with the idea. According to a report from the Congressional Research Service , however, the Treasury Department insists that it has no authority to treat some payments as more important than others, even if it would be wise to do so. Prioritizing payments because of a debt-limit impasse, the report said, could constitute the sort of action prohibited by the act, which bars the administration from delaying or withholding spending for policy reasons.
A third issue is more practical. As Treasury officials have said several times over the years, the department is not set up to pick and choose which obligations to pay. So while it might be humane to prioritize retirement and disability checks, for example, or it might help avoid a global panic to prioritize payments on U. After a summer of criticism, political pressure on Kamala Harris eases — for now.
Politics is a strange business. All the attention paid to Kabul and the coronavirus has taken some of the pressure off Vice President Kamala Harris, who spent the early part of the summer taking heat over the large increase of migrants heading to the U.
The House narrowly passed a bill on Sept. Republicans argue that the reconciliation bill offers Democrats the simplest way to raise the debt limit and avert a default.
As direct as that path might seem, however, it includes some significant hurdles. Treasury would continue to pay interest on those Treasury securities as it comes due. And, as securities mature, Treasury would pay that principal by auctioning new securities for the same amount and thus not increasing the overall stock of debt held by the public. Timely payments of interest and principal of Treasury securities alongside delays in other federal obligations would likely result in legal challenges.
On the one hand, the motivation to pay principal and interest on time to avoid a default on Treasury securities is clear; on the other, lawsuits would probably argue that holders of Treasury securities have no legal standing to be paid before others. It is not clear how such litigation would turn out, in part because the law itself imposes contradictory requirements on the government—requiring it to make payments, honor the debt, and not go above the debt limit, three things that cannot all happen at once.
If the debt limit binds, and the Treasury were to make interest payments, then other outlays will have to be cut by about 40 percent in aggregate.
The need for the sharp cut reflects two factors. First, the government is running annual deficits: for fiscal year as a whole, CBO expects 22 cents of every dollar of non-interest outlays to be financed by borrowing. Second, infusions of cash to the Treasury from tax revenues vary greatly by month, and tax revenues in October and November tend to be fairly muted. Thus, the required cuts to federal spending when an increase in federal debt is precluded are particularly large during these months.
If Treasury wanted to be certain that it always had sufficient cash on hand to cover all interest payments, it might need to cut non-interest spending by more than 40 percent. The extent of the economic costs of the debt limit binding, while assuredly negative, are enormously uncertain.
Assuming interest and principal is paid on time, the very short-term effects largely depend on the expectations of financial market participants, businesses, and households.
Would the stock market tumble precipitously the first day that a Social Security payment is delayed? Would the U. Would there be a run on money market funds that hold short-term U.
What actions would the Federal Reserve take to stabilize financial markets and the economy more broadly? Much depends on whether investors would be confident that Treasury would continue paying interest on time and on how long they think the impasse will persist. If people expect the impasse will be short lived and are certain that the Treasury will not default on Treasury securities, it is possible that the initial response could be muted. However, even if the debt limit were raised quickly so that it only was binding for a few days, there would likely be lasting damage.
The origin of the U. Fed chair flags corporate bond risk. Can a platinum coin solve the debt-ceiling standoff? Also Included in. Tags in this Story. Share this Story. Latest Episodes From Our Shows.
0コメント