U.S. political leaders struck a deal Wednesday to reopen the government until January 15 and raise the debt ceiling until February 7.
Without the deal, the U.S. Treasury Department would have hit the debt ceiling on October 17, but would be able to engage in “extraordinary measures” using cash on hand to continue servicing its debts until around November 15.
Failure to raise the debt ceiling before the Treasury ran out of cash was seen as the biggest risk to financial markets from the fiscal crisis in Washington, D.C. because it would force the Treasury to default on short-term obligations, potentially calling into question the status of U.S. government debt as a safe-haven investment.
BofA Merrill Lynch has already downgraded its GDP growth forecast for Q1 2014 in response to politicians’ decision to put off the resolution of the fiscal crisis until next year.
However, this next time around, the Treasury will likely have a lot longer than just a month to manoeuvre around the debt ceiling.
BAML strategists Marcus Huie and Ian Gordon explain why:
The second date is 7 February, when the suspended debt limit is revived and effectively marked to market as of the debt outstanding on that date. On that date, if the limit has not been raised, the Treasury would be obliged once again to engage in extraordinary maneuvers to finance the deficit and prevent a default. The length of time that these maneuvers can delay a default date is uncertain, because of the special variable flows around that period — the extension could be as short as two months or as long as five months.
February and March see large extra outlays by the federal government to pay for tax refunds, while April and June are months with extra-large tax receipts. If the Treasury can make it past the refund months and into the latter part of April, it could manage to avoid default until June or July. However, as we have noted above, the political incentive to game the debt ceiling has been much diminished.
“We also expect a relative benign outcome around the debt ceiling,” says Ethan Harris, BAML’s co-head of global economics research. “The Treasury can run for several months using extraordinary measures and revenues from the big tax season. Thus, unlike in the fall, the two deadlines don’t come right on top of each other.”
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