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Policy Matters

Treasury Financing Status and the Debt Limit

Western Asset


Treasury Secretary Jack Lew has said that unless Congress increases the debt limit, Treasury will run out of borrowing authority on October 17. As this deadline draws closer, we have received a number of questions from clients about the potential consequences if Treasury runs out of borrowing authority. It is important to emphasize at the outset that a default on Treasury securities is an extremely unlikely outcome. We are optimistic that a political solution will be reached before Treasury runs out of cash. The situation is extremely fluid: even as we write, there are new proposals being discussed that could push out the date that Treasury exhausts its borrowing authority past October 17. While we remain optimistic and are watching the back-and-forth in Washington DC very carefully, we do recognize the importance of thinking through all of the contingencies. The notes here outline our understanding of the options Treasury would face after running out of borrowing authority, as well as a discussion of how different parts of the financial system might be affected.

It is also important to note that any analysis of what will happen after the debt limit is reached is necessarily speculative, because there is no good precedent for the current situation, and because decisions made by individual policymakers are impossible to fully anticipate.

The following addresses three separate, but related questions: (1) What happens after October 17? (2) If the debt limit is not raised, can Treasury avoid a technical default? (3) How might the financial system respond to a technical default?

1. What happens after October 17?

Treasury Secretary Jack Lew has said that unless Congress increases the debt limit, Treasury will run out of borrowing authority on October 17. As this deadline draws closer, we have received a number of questions from clients about the potential consequences if Treasury runs out of borrowing authority. It is important to emphasize at the outset that a default on Treasury securities is an extremely unlikely outcome. We are optimistic that a political solution will be reached before Treasury runs out of cash. The situation is extremely fluid: even as we write, there are new proposals being discussed that could push out the date that Treasury exhausts its borrowing authority past October 17. While we remain optimistic and are watching the back-and-forth in Washington DC very carefully, we do recognize the importance of thinking through all of the contingencies. The notes here outline our understanding of the options Treasury would face after running out of borrowing authority, as well as a discussion of how different parts of the financial system might be affected.

It is also important to note that any analysis of what will happen after the debt limit is reached is necessarily speculative, because there is no good precedent for the current situation, and because decisions made by individual policymakers are impossible to fully anticipate.

The following addresses three separate, but related questions: (1) What happens after October 17? (2) If the debt limit is not raised, can Treasury avoid a technical default? (3) How might the financial system respond to a technical default?

Exhibit 1
Source: Bloomberg, Congressional Budget Office

Treasury Secretary Jack Lew has said that unless Congress increases the debt limit, Treasury will run out of borrowing authority on October 17. As this deadline draws closer, we have received a number of questions from clients about the potential consequences if Treasury runs out of borrowing authority. It is important to emphasize at the outset that a default on Treasury securities is an extremely unlikely outcome. We are optimistic that a political solution will be reached before Treasury runs out of cash. The situation is extremely fluid: even as we write, there are new proposals being discussed that could push out the date that Treasury exhausts its borrowing authority past October 17. While we remain optimistic and are watching the back-and-forth in Washington DC very carefully, we do recognize the importance of thinking through all of the contingencies. The notes here outline our understanding of the options Treasury would face after running out of borrowing authority, as well as a discussion of how different parts of the financial system might be affected.

It is also important to note that any analysis of what will happen after the debt limit is reached is necessarily speculative, because there is no good precedent for the current situation, and because decisions made by individual policymakers are impossible to fully anticipate.

The following addresses three separate, but related questions: (1) What happens after October 17? (2) If the debt limit is not raised, can Treasury avoid a technical default? (3) How might the financial system respond to a technical default?

2. If the debt limit is not raised, can Treasury avoid a technical default?

Treasury Secretary Jack Lew has said that unless Congress increases the debt limit, Treasury will run out of borrowing authority on October 17. As this deadline draws closer, we have received a number of questions from clients about the potential consequences if Treasury runs out of borrowing authority. It is important to emphasize at the outset that a default on Treasury securities is an extremely unlikely outcome. We are optimistic that a political solution will be reached before Treasury runs out of cash. The situation is extremely fluid: even as we write, there are new proposals being discussed that could push out the date that Treasury exhausts its borrowing authority past October 17. While we remain optimistic and are watching the back-and-forth in Washington DC very carefully, we do recognize the importance of thinking through all of the contingencies. The notes here outline our understanding of the options Treasury would face after running out of borrowing authority, as well as a discussion of how different parts of the financial system might be affected.

It is also important to note that any analysis of what will happen after the debt limit is reached is necessarily speculative, because there is no good precedent for the current situation, and because decisions made by individual policymakers are impossible to fully anticipate.

The following addresses three separate, but related questions: (1) What happens after October 17? (2) If the debt limit is not raised, can Treasury avoid a technical default? (3) How might the financial system respond to a technical default?

3. How might the financial system respond to a technical default?

Treasury Secretary Jack Lew has said that unless Congress increases the debt limit, Treasury will run out of borrowing authority on October 17. As this deadline draws closer, we have received a number of questions from clients about the potential consequences if Treasury runs out of borrowing authority. It is important to emphasize at the outset that a default on Treasury securities is an extremely unlikely outcome. We are optimistic that a political solution will be reached before Treasury runs out of cash. The situation is extremely fluid: even as we write, there are new proposals being discussed that could push out the date that Treasury exhausts its borrowing authority past October 17. While we remain optimistic and are watching the back-and-forth in Washington DC very carefully, we do recognize the importance of thinking through all of the contingencies. The notes here outline our understanding of the options Treasury would face after running out of borrowing authority, as well as a discussion of how different parts of the financial system might be affected.

It is also important to note that any analysis of what will happen after the debt limit is reached is necessarily speculative, because there is no good precedent for the current situation, and because decisions made by individual policymakers are impossible to fully anticipate.

The following addresses three separate, but related questions: (1) What happens after October 17? (2) If the debt limit is not raised, can Treasury avoid a technical default? (3) How might the financial system respond to a technical default?

Endnotes

  1. Bipartisan Policy Center, “As BPC’s X-Date Window Narrows, Economic Risks Grow” October 8, 2013
  2. Inspector General of the Department of the Treasury, Letter to Senator Hatch, August 24, 2012
  3. Mark Patterson, “One way out on the debt ceiling,” Politico, October 3, 2013
  4. Laurence Tribe, “A Ceiling We Can’t Wish Away,” New York Times, July 7, 2011
  5. Transcript of President Obama’s Press Conference, Washington Post, October 8, 2013
  6. Secretary Lew letter to Speaker Boehner, May 17, 2013
  7. United States General Accounting Office, “Analysis of Actions During the 1995-1996 Crisis,” August 1996
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