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The U.S. Treasury has a decision to make on cutting spending in one month if it is to extend its ability to avoid hitting the debt ceiling, according to Societe Generale’s Rudy Narvas.Narvas still believes we’re going to get an eleventh hour deal before August 2, but notes the Treasury might need to ramp up its plans to cut spending to extend that deadline.
From Rudy Narvas:
There are three key tools that Secretary Geithner can use in order to delay the US from entering default and they include: (1) cutting spending, (2) prioritizing payments, and (3) selling assets. We emphasise that such moves would buy policymakers time to come to an agreement, but if they take too long, default may be inevitable.
On the spending side, the Treasury would have to announce any move to cut spending by around mid-July in order for the measures to be effective by early August. As was indicated by Moody’s last week, such an event would force the ratings agency to put the US on credit watch negative.
The Treasury could also prioritise spending on bondholders, or sell assets (like mortgage backed securities and student loans) into the market to keep itself funded. One problem with selling assets is that credit markets are already seeing risk aversion rise as a result of the Fed selling assets from its Maiden Lane bailout.
So if suddenly, the Treasury dumped a bunch of risk assets on the market in August too, demand could be weak, prices could be low, and investors may become even more fearful than an extension of the debt ceiling deadline woul make them in the first place.
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