Everyone is quite freaked out and a little confused about the October 17 debt ceiling.
But many experts believe fears are a bit premature and perhaps overblown.
“What we don’t get is why Oct. 17 is considered the day the U.S. defaults,” pondered Greg Valliere, a political analyst for Potomac Research Group. “That probably would not come for another week — but the media, the markets and most politicians have bought into the narrative that tomorrow is the real deadline.”
You see, hitting the debt ceiling means that the Treasury Department no longer has the authority to raise money by issuing bonds. This doesn’t mean that the Treasury is broke.
While this is a big deal, this is not a default.
If there’s one thing confused American’s need to know about the debt ceiling, it’s this: after hitting the debt ceiling, the Treasury Department will have roughly $US30 billion to continue paying its obligations. Experts believe this buys the U.S. around a week or two before we run into serious trouble.
“Going past the October 17 deadline is likely to exacerbate those and could deal another blow to confidence,” said Goldman Sachs’ Jan Hatzius. “That said, the practical implications of going past October 17 are manageable.”
Hitting the debt ceiling very well could bring volatility to the markets. But experts believe things will only get really ugly if the government fails to repay its bondholders in a timely manner.
So why all the panic and confusion? Morgan Stanley’s Vincent Reinhart blames/thanks Treasury Secretary Jack Lew. From Reinhart’s Tuesday note to clients:
Sleight of Hand with Secretary Lew
Secretary Jack Lew’s main contribution has been to convince legislators that a soft date is scarily hard, keeping politicians negotiating in advance of what they believe is the crack of doom. What the Treasury has explained is that on October 17th, it will only have $US30 billion in cash in its account at the Federal Reserve, it will have exploited all extraordinary measures for which there is precedent, and that it will not consider schemes to protect coupon and principal payments at the expense of other Treasury claimants. There are multiple qualifiers in that statement, the most important of which is that the Treasury anticipates still having cash. Default is the event pressed upon the Treasury when the risk materialises of over-drafting at its fiscal agent, the Federal Reserve, which cannot lend directly to the Treasury. With cash still expected in the till, October 17th is really not the event horizon, even before considering expanding the frontier of extraordinary measures before or on that day.
Lew debt ceiling sparked a sense of much needed urgency.
However, the cost may be unwarranted volatility in the markets in the near-term.