What if the Treasury were to go over the X date (date beyond which the Treasury cannot honor all its payments) without the debt ceiling being raised? As BofAML notes, the Treasury estimates the X date to be October 17, though they believe that the Treasury may have enough cash and incoming tax receipts to last a few more days. In either case, the date is not too far out. Market concerns over possible postponed payment have been rising as indicated by the performance of October and November bills. What are the options of for the Treasury?
In our view, most options are unviable – the most fair and sensible option would be to implement a delayed payment regime where no payments would be made until they could all be made on a day-by-day basis.
1. 14th Amendment will not be used
The White House has ruled out raising the debt ceiling using the 14th amendment (which states that the validity of the public debt of the United States cannot be questioned). National Economic Council Director Gene Sperling and Presidential Adviser Dan Pfeiffer have both rejected using this option this week. Also, earlier this year, the White House press secretary emphasized that the Administration did not believe that the 14th Amendment gives the president the power to ignore the debt ceiling.
2. Trillion dollar coins will not be minted
We do not believe the Treasury will even consider minting coins (which are not subject to debt ceiling) and asking the Fed to purchase them to temporarily get over the debt ceiling. The legality of this is questionable, and it would further deepen the distrust between the two political parties. It would also risk being the first step down a slippery slope of debt monetization. We believe it would be extremely unlikely the Fed would agree to accept platinum coins in return for making Treasury’s payments, as it would politicize the Fed and put its independence at risk.
3. Asset sales are unlikely
During the 2011 debt ceiling debate, Treasury officials rejected the option of selling gold reserves as it would undercut confidence in the US and destabilize the world financial system. Treasury officials determined that a “fire sale” of other assets like TARP assets would not maximize value for taxpayer and could be detrimental. These asset sales would also buy very little time. Since then, the Treasury has completely wound down its MBS portfolio and TARP assets now total less than $25bn.
4. Prioritization of payments: Treasury will be unwilling
Another option in case of a breach of the ceiling would be the prioritization of debt service payments by the Treasury. The idea of issuing scrips or IOUs to claimants (other than those who hold US Treasury debt) would be another manifestation of the same idea, wherein debt payments are deemed superior. However, this may be impossible from an operational standpoint. The Treasury makes 80-100 million payments per month, and modifying systems to pick and choose would be an operational nightmare. The administration would be accused of picking winners and losers and become the center of intense media and public scrutiny. In 2011 when a bill to prioritize debt payments was introduced, the proponents were accused of paying China instead of federal workers. In 2011, Treasury officials reportedly determined that there was no fair or sensible way to pick and choose among the many bills that are due every day.
5. Delayed payment regime most likely
We believe the most plausible option for the Treasury could be implementing a delayed payment regime. In such a scenario, the Treasury would wait until it has enough cash to pay off an entire day’s obligations and then make those payments on a day-to-day basis. For example, if the Treasury did not have enough cash to pay all of its obligations on November 1, 2013, it would wait until enough receipts flow in (perhaps not until November 3 or 4) and then make good on all payments for the 1st. Given that the US has a sizable monthly deficit, the delay would worsen by the day, but at least the Treasury would not have to pick winners and losers.