The debt ceiling drama has reached a fever pitch in recent weeks. As of May 17, the U.S. Treasury had roughly $68 billion of cash on hand and another $92 billion of untapped extraordinary measures. Taken together, Treasury had just $160 billion of additional borrowing capacity remaining under the debt ceiling.
How long will that borrowing capacity keep the U.S. government afloat? During a May 21 appearance on NBC’s “Meet the Press”, Treasury Secretary Janet Yellen said the odds of reaching June 15 and being able to pay all the government’s bills are “quite low”, while noting there is always uncertainty about future tax receipts and spending.
Our own internal tracking is a bit more optimistic, but the forecasting misses in recent weeks and months have been towards a greater financing need/bigger budget deficits, which does not inspire much confidence. It has become increasingly clear that, even in the best case scenario, the Treasury’s General Account will be extremely low (<$50 billion) in the first half of June if the debt ceiling is not raised. Put another way, a fifty-fifty chance of an early June default in the absence of a debt ceiling increase is still very concerning and highlights the clear risk of hitting the X date in early June.
As we have written previously, if Treasury can manage to stretch its funds to June 15, an infusion of corporate tax revenue and the unlocking of a new extraordinary measure on June 30 would likely keep the U.S. government afloat until the beginning of August.
While the Treasury’s cash balance and extraordinary measure balances continue to dwindle, lawmakers are attempting to negotiate a deal that would increase or suspend the debt ceiling. So far, negotiations between the two sides have not yielded a deal. This is not to say no progress has been made. But there remain major outstanding questions that still need answers to close a deal.
So what happens next? In our view, there are three possibilities. First, Republicans in Congress could strike a sweeping deal with President Biden and Democrats in Congress to increase or suspend the debt ceiling for 1-2 years. For a deal to be reached and turned into law before early June, a breakthrough in the negotiations will need to occur this week.
Another possibility is policymakers agree to a short-term debt ceiling increase that buys more time for negotiations. In this scenario, we envision a debt ceiling suspension for a very short period of time, perhaps one or two months.
The third possibility is that the standoff continues, and we venture into the early June danger zone with Treasury perilously close to exhausting its borrowing capacity.
We believe a short-term debt ceiling increase that gives negotiators a bit more time to reach a broader agreement is the most likely outcome, but the situation remains very uncertain and precarious, and we would not be shocked if any of these three possibilities are realized.
We have continued to field numerous questions about the various contingency plans available to policymakers in the event the debt ceiling X date is breached. Although we are not entirely dismissive of such “break the glass” options, we do not view any of them as painless silver bullets. Ultimately, if any of these numerous plans are adopted, they would be entirely experimental and would come with a litany of legal, technical, economic and political challenges.