U.S. Treasury Will Run Out Of Cash in Mid-October, CBO Warns*
By Tyler Durden
With Trump tax reform far on the backburner, as the administration is focused on at least getting Obamacare repeal past the Senate, the CBO reminded that in just 4 months a more material threat is facing the U.S.: according to the latest CBO calculations, the Treasury will “most likely” run out of cash in early to mid-October, unless the most polarized Congress in history raises the debt ceiling.
This is what the CBO just said in its latest report on the “Federal Debt and the Statutory Limit”, released moments ago.
If the debt limit is not increased above the amount that was established on March 16, 2017, the Treasury will not be authorized to issue additional debt that increases the amount outstanding. (It will be able to issue additional debt only in the amount of maturing debt or the amounts cleared by taking extraordinary measures.) That restriction would ultimately lead to delays of payments for government programs and activities, a default on the government’s debt obligations, or both. CBO estimates that without an increase in the debt limit, the Treasury, by using all available extraordinary measures, would most likely be able to continue borrowing and have sufficient cash to make its usual payments until early to mid-October of this year.
In recent weeks, Treasury Secretary Mnuchin has urged Congress to lift the debt limit before its August recess (with others calling to abolish it altogether) although he also conceded that the nation can likely pay its bills if action waited until September, which is all lawmakers needed to know they don’t have to rush until the very last minute.
He has also warned that the closer the U.S. gets to breaching the debt ceiling in mid-October, the more likely financial markets are to react unfavorably, although that warning appears to have been negated by his first one. On Thursday following the release of the CBO report, he again urged Congress to take action.
“For the benefit of everybody, the sooner that they do this the better,” he said at a White House briefing, although he once again diluted his case by adding that “we have contingency plans” if Congress doesn’t raise debt ceiling by a certain date, so the market “shouldn’t be concerned.” Which is all the market needed to know to keep rising until sometime in early October, when it freaks out again.
Of course, the Treasury breached its debt limit on March 16, when the debt ceiling was reset to $19.8 trillion, however, so far there has been no new borrowing authority to surpass it. Since then the Treasury has been using so-called “extraordinary measures,” to pay bills without technically adding to the debt amount, while draining various Treasury emergency funds. As shown in the Citi chat below, those measures are expected to be exhausted in October, although Citi acknowledged the risk of an earlier date (in September) if monthly deficits worsen, and/or if the Treasury refuses to draw down its cash balance to compliment use of “extraordinary measures.”
As the next chart shows, the Treasury traditionally accumulates larger cash balances ahead of debt ceiling showdowns. It is when the cash balance hits zero and the Treasury taps all extraordinary measures without the authority to borrow more, that things can spiral out of control.
“That would ultimately lead to delays of payments for government programs and activities, a default on the government’s debt obligations, or both,” the CBO report noted.
The last time the U.S. infamously shut down due to passing its debt ceiling was in August 2011, when S&P downgraded the U.S., formerly at a AAA rating, for the first time ever prompting a furious response from then-Treasury secretary Tim Geithner.
As The Hill notes, Republicans are wary of increasing the debt limit without tying it to some set of spending or regulatory reforms, a tactic they pursued under President Barack Obama. Furthermore, Republicans will need Democratic support in the Senate to increase the debt ceiling, but Democrats have demanded that Republicans keep the measure free of “poison pill” riders or other policies.