Congress has yet to address the debt ceiling, which is the point when the U.S. Treasury will no longer be able to borrow money by issuing debt. Treasury Secretary Jack Lew says the U.S. will hit the ceiling on October 17.
However, October 17 is not when the Treasury is expected to run out of cash and default on its liabilities.
So, it’s possible that a debt ceiling deal could occur after October 17 with limited consequences.
In fact, this is the baseline scenario of Deutsche Bank Chief US Economist Joe LaVorgna.
“We expect a budget/debt ceiling deal sometime between the Treasury’s Oct 17 deadline and Oct 31 which is when the Treasury runs out of cash,” tweeted LaVorgna.
Here’s more from a note LaVorgna just published:
Is October 17 the drop-dead date to raise debt ceiling? This is what Treasury Secretary Lew said, but it really depends on the Treasury’s finances. Thus, the answer is NO. In fact, there is some leeway after the October 17 date to keep the government’s finances operational without a debt ceiling increase. We believe the Treasury can fund the government until the end of the month, up to October 31. The real issue is whether financial markets will panic between October 17 and October 31, thereby forcing the Administration and Congress to reach a deal. Hence, our best guess is that the government will reopen between October 17 and October 31.
Will the Treasury default or prioritise interest payments? The latter point is sometimes referred to as a technical default as some recipients may get paid (i.e., bond holders and Social Security beneficiaries) and some may not (i.e., defence contractors and essential government employees). The answer to both questions is a resounding NO…
“The S&P 500 likely drops to about 1650 if convincing signs of an imminent deal do not emerge by Friday, but not under 1625 as a deal should come before Treasury exhausts its funds,” wrote Deutsche Bank’s David Bianco today. “A multi-week shutdown will drag on GDP, but 4Q GDP & EPS growth will still be decent. We see missed interest payment risk as nonexistent and would use any weakness next week to buy non-financials.”