We are on Day Seven of the 17% Shutdown, but a more ominous deadline approaches in ten days for the budget impasse in Washington. Treasury Secretary Jack Lew estimates that the US will have exhausted its borrowing power by October 17th, and that any additional deficit spending will require a new authorization from Congress for a higher debt limit. A failure to make the change by the 17th will create a technical default, the administration claims, while conservatives have argued for two years that the government can prioritize its spending to pay its Treasury and statutory obligations first to avoid one.
The CEO of credit rater Moody’s agrees with the conservatives, and reassured markets that the US will almost certainly choose to do so:
The CEO of credit rating agency Moody’s ruled out the chance of a U.S. government default, even if an agreement over raising the debt ceiling is not achieved by mid-October. …
“It is extremely unlikely that the Treasury is not going to continue to pay on those securities,” Moody’s CEO Raymond McDaniel said in an interview with CNBC.
“Hopefully it is unlikely that we go past October 17 and fail to raise the debt ceiling, but even if that does happen, then we think that the U.S. Treasury is still going to pay on those Treasury securities,” he added.
That probably explains why the markets are giving this the ho-hum treatment so far:
Thus far, financial markets have displayed a relatively muted reaction to the government shutdown, which began last Tuesday after Democrats and Republicans failed to renew the federal budget into a new fiscal year. Wall Street’s S&P 500 is up roughly 0.5 percent since the beginning of the shutdown to Friday’s close, for example.
McDaniel attributed the markets’ seemingly complacent reaction to the relatively fresh memory of the 2011 political stalemate over the debt ceiling issue, which was ultimately resolved.
“[It] feels a lot like we’ve seen this movie before,” said McDaniel. “Ironically because we have had this experience in the recent past [it] gives people more of a sense of calm than perhaps they should have.”
CNBC also notes that the moment of prioritization has almost arrived for Lew:
Treasury Secretary Jack Lew is about to face the very same choices confronted by any financially struggling American household: Which bills to pay and when to pay them.
If Congress fails to raise the debt ceiling by around Oct. 17, Lew, who has been in the job less than a year, will have to sit at his desk and figure out how to make due on roughly one-third less in the way of government funds for the bills he has to pay. Because he can no longer borrow, according to the Bipartisan Policy Center, government spending will fall by about 32 percent, or $108 billion in the first month.
It’s like the head of a household who has a family member gone wild with a credit card: Lew will be responsible for paying the very bills that Congress has rung up, even while Congress denies him the right to borrow money to pay for them.
But there are some key differences with households: While a homeowner might juggle a dozen or so monthly bills, Lew has to figure out which of more than 100 million monthly government payments to make. Because the government payment system is largely automated, Lew can’t just decide not write a check here or there. He has to figure out how to transform a system designed to pay all of America’s bills in full and in a timely way, to one that pays some of its bills, and not others.
My guess is that we’ll get some sort of face-saving deal by the 15th or so, which will make this unnecessary. However, Lew might want to expedite the development of this solution just in case.