The head-height US debt ceiling

Robert Sierra - 15 March 2017

We’ve been here before. In 2011, a bitter battle brought the federal government to almost complete standstill as overnight negotiations yielded little compromise from Congressional Democrats and Republicans. Markets were rattled. Banks and companies withdrew billions of Dollars from money market funds that invest in US Treasury bills and credit agency S&P downgraded the country’s credit rating for the first time in history. It happened again in 2013, at which point the government shut down. It happened once more in 2015, when Congress and President Obama agreed to a temporary suspension of the ceiling, standing at the time at US$18.1trn. That deadline expires once again today (Wednesday 15 March) at which point the ceiling will kick in at the prevailing debt level of US$20.1trn, just as the FOMC concludes its policy meeting.

The Treasury Department can then use a variety of “extraordinary measures” to delay a breach of the ceiling until mid-summer or even October, as some have suggested, and hence avoid the embarrassment of deferred payments or IOUs and the catastrophe of formal default on a debt obligation. Treasury Secretary Steven Mnuchin wrote to Congress last week urging an increase in the ceiling by midnight on Friday, 17 March.

When the debt ceiling is eventually reinstated, the new limit may expand to accommodate any new debt the government has taken on while the ceiling was suspended but it will not leave room for additional financing! The government has been extremely careful to keep the debt below US$20trn in anticipation of bad headlines and has run down its cash balances to this end. At the beginning of the year, the federal government’s balance was US$400bn; on the day of Donald Trump’s inauguration, the government’s cash balance was US$384bn and today that balance is just US$34bn (link), lower than Google’s estimated cash reserves of US$75bn. Good to see the administration leading the way on the cashless society!

Politically, a repeat of previous debt ceiling brinkmanship appears to be unlikely given that Republicans control both chambers of Congress and a Republican is installed in the White House. However, the issue could be complicated by the fact that some conservative Republicans are hoping to tie in any increase in the debt limit with legislation to reduce the country’s US$500bn-plus budget deficit. Democrat House Minority Leader Nancy Pelosi, said recently that Democrats would only support a “clean” debt limit increase that has no other legislation attached to it. Senate majority leader Mitch McConnell has assured that the US will not default on its debt and that a debt limit rise will certainly happen “in some fashion”.

While markets should take comfort that a repeat of previous lengthy and unsettling episodes is unlikely, this is a highly emotive issue and what better time for a scrap than the beginning of a 4-year term?

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