US Debt Ceiling: Borrowing limit re-imposed on 16 March - HSBC

Analysts at HSBC explain that the limit on the maximum amount of federal government borrowing has been suspended for over a year, but will be re-imposed on 16 March and this does not create an immediate crisis since the Treasury has access to alternative means of financing that will likely last through August and perhaps all the way to October or November.

Key Quotes

“As of the end of February, the Treasury’s total outstanding debt was USD19.9trn. The debt ceiling should be set close to that level on 16 March.”

“Imposing a debt limit on the Treasury immediately creates financing problems for the US government. The Treasury’s expenditures have averaged USD322bn/month for the past 12 months. Tax receipts have averaged only USD273bn, leaving an average monthly deficit of USD49bn.”

“As of 10 March, the Treasury had only USD30bn of cash on hand, hardly enough to cover one month’s budget deficit. Absent alternative means of financing, the Treasury would soon be in a position where it might have to default on some of its financial obligations. Indeed, some commentators, including David Stockman, former budget director under President Reagan, are warning that after 15 March there will be a debt ceiling crisis in which “everything will grind to a halt.”

“That is a misreading of the situation, in our view. The Treasury does have alternative means of financing that should enable it to meet its financial obligations at least until mid-September and possibly until early November. We expect that a debt ceiling crisis, if one does occur, will not happen for another six months or so.”

“All in all, it appears that the Treasury has about USD350bn available to it in “extraordinary measures” to create borrowing capacity under the new debt ceiling. With the average monthly budget deficit at close to USD50bn, these extraordinary measures should carry the Treasury through to roughly mid-October before it might be in a situation where it cannot pay its bills.”

The exact day that the Treasury will truly run out of money is uncertain. It depends on the flow” of tax receipts and expenditures over the next several months. If tax receipts fall short of current estimates, or if expenditures are greater than expected, then the day of reckoning will move closer. The opposite will hold if tax receipts are greater than currently estimated or if expenditures fall short of current estimates.”

“Not a crisis… for now

Because the Treasury has access to its “extraordinary measures” there is no urgency in the Congress to deal with the debt ceiling at this point. Members of Congress know that the Treasury should be able to operate as it normally does at least through August.

Financial markets will likely not pay much attention to the imposition of a new debt ceiling on 16 March because it is already widely known that the debt ceiling will not bite until later this year. But as the months roll by, the possibility for a real debt ceiling crisis will get closer. Sometime in August, we expect the real countdown to the imposition of a new debt limit will begin.”