What if Congress doesn't increase or suspend the debt ceiling?

by Wall Street Rebel | Michael London | 09/13/2021 12:00 Noon
What if Congress doesn't increase or suspend the debt ceiling?

After exhausting all other options, the Treasury Department says it has no plans to choose which payments to make and which obligations to save.

 

The Treasury Department has said that it has made no plans to determine which payments it would make and which obligations owed to the United States government it would put aside once all options for avoiding a federal debt limit default have been explored.

Many strategists believe that prioritizing payments on publicly listed U.S. companies is viable. The purchase of Treasury bonds or the postponement of some debt due deadlines is still theoretically conceivable in a worst-case scenario.

Moreover, the bond market in the United States, which has the world's largest bond market, and the liquidity of these bonds are the basis of the dollar's position as the world's reserve currency, adding to the argument that they should be prioritized above other commitments.

This confidence in government is partly based on President Barack Obama's once-secret debt-limit contingency plan, which Secretary Janet Yellen's staff has said that the administration would not use at this time.

According to Federal Reserve conference calls records, officials from the Federal Reserve discussed specifics during the highly charged discussions over increasing the debt limit in 2011 and 2013. "What the transcripts tell me is that the Treasury can prioritize payments," said Bank of America Corp.'s Mark Cabana, who is in charge of interest-rate strategy in the United States said…

"Their willingness to do so was another matter."

" Even if you merely acknowledged the concept, declaring that you are going to pay China and Japan instead of Social Security recipients would be very contentious."

When something is finished on time, it is said to be "on time."

Japan and China are the largest foreign investors of U.S. Treasury bonds, each owning more than $1 trillion in Treasury securities.

The Treasury is not engaging in discussing what would happen if Congress fails to suspend or increase the debt limit, restored at $28.4 trillion at the beginning of August following a two-year suspension.

Janet Yellen said earlier this week that extraordinary measures to keep the nation from exceeding the limit would only be in place until October.

According to Treasury spokeswoman Lily Adams on Wednesday, the United States "pays all of its obligations on time."

Like it has done hundreds of times, Congress is the only option for the government to deal with the debt limit.

Related: The Most Surprising Aspect of the Debt Ceiling Debacle Is How It Will Affect Bonds

The Treasury market has lately shown signs of concern about Congress failing to act in a timely way.

Investors demand greater compensation for the increased risk, so the yields on notes that expire in late October or early November are higher than the rates on bills that mature earlier or later.

JPMorgan Chase & Co. analysts anticipate that demand for safe-haven assets will lead longer-term Treasury bond rates to fall.

"Yields on bills may increase, but coupon yields may decrease if the debt limit dispute continues," said a team of JPMorgan analysts led by Alex Roever in research released Friday.

Wrightson ICAP predicts that the government's finances and extraordinary measures will run out around October 22nd, the so-called "drop-dead date."

The Biden administration and Democratic leaders in Congress have urged Republicans to accept a suspension or raise the debt ceiling.

The overwhelming majority of Republican Senators, on the other hand, have indicated that they would vote nay on the measure.

According to Thomas Torgerson, co-head of sovereign ratings at DBRS Morningstar, the current impasse increases the risks to the outlook for the United States' credit rating on a global scale, particularly in the European Union.

Even if Treasury payments are maintained, failing on any of the many other government obligations — from Social Security to financing regular federal government operations — may have a detrimental effect on public perceptions of the United States' creditworthiness.

S&P Global Ratings downgraded the United States in 2011 after a protracted — but ultimately successful — battle to increase the country's debt limit.

In the middle of another comparable fight two years later, Fitch Ratings put the United States on negative watch.

Fitch subsequently withdrew the grade in 2014, but the firm says it will be restored in July 2020.

Moody's Investors Service projected that if the debt limit were increased in a series of debt ceiling conflicts in 2017, the Treasury would prioritize debt service above other obligations.

Nonetheless, Mark Zandi, chief economist of Moody's Analytics, believes that if this occurs, borrowing rates in the United States will rise due to the collateral damage caused by failing to fulfill other obligations, even if only for a short period.

 

                     U.S. Debt-Ceiling Crisis: How Will The Markets React?

 

 

 

[Strategic Investment: The Post WWII World Order is About to Collapse]

 

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