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The ‘X-date’ approaches

What’s the deal with the debt ceiling? MSNBC answers your default questions.
/ Source: All In

What’s the deal with the debt ceiling? MSNBC answers your default questions.

At the U.S. Capitol in Washington, October 10, 2013.  (Photo by Jonathan Ernst/Reuters)

Finally, President Barack Obama and Republicans just might be driving toward a deal to raise the debt ceiling—and now’s no time to take their foot off the gas.

The debt ceiling deadline is coming up on Oct. 17th. If there’s no agreement to raise the country’s borrowing limit, the entire health of the U.S. economy—and the world’s—may be vulnerable. 

Here’s everything you need to know about the debt ceiling, why there’s a deadline to deal with it, and the politics shaping the fight.

If Congress doesn’t raise the debt-ceiling by Oct. 17, does the U.S. default?

Not exactly. But that doesn’t mean we can rest easy if Washington fails to act.

The Oct. 17 debt ceiling deadline isn’t a cliff—today you’re solvent, tomorrow you’re not. We actually hit the debt ceiling back in May, but the Treasury Department has been relying on so-called “extraordinary measures”—essentially moving the timing of some intra-governmental payments around to buy more time.

On Oct. 17, however, the Treasury predicts that it won’t be able to rely on these kind of accounting tricks to make good on U.S. debts in full and on time. At this point, Treasury won’t be able to borrow anymore and estimates it will have only $30 billion in cash on hand, which won’t be enough to guarantee that the government can pay all of its bills on any given day. The risk of missing payments rises the more time passes after Oct. 17.

Wait, so the government doesn’t know exactly when it will run out of cash?

 That’s right—and neither does anyone else. 

At some point after Oct. 17—known as the “X-date”–the government will spend all of its cash on hand, and it won’t have enough revenues to cover all its expenses. The stream of revenues going into and expenses coming out of Treasury’s piggy bank changes every day, and the volume is pretty staggering: Treasury makes about four to five million payments every day, the Bipartisan Policy Center estimates. And anticipated revenues will fluctuate depending on whether people pay their taxes, fines, and other obligations to the government on time. 

But there are certain very large payments that are scheduled to happen after October 17 that will make it increasingly likely that the government won’t have enough cash on hand to pay all of its bills.

The Bipartisan Policy Center has outlined the major bills there are coming due, which will leave Treasury strapped for cash if the borrowing limit isn’t raised:

(Courtesy of Bipartisan Policy Center)

According to the group’s estimates, the X-date will be between Oct. 22 and Nov. 1,  based on when they believe these payments will exceed the cash the government has on hand. (Treasury hasn’t released its own estimate of the X-date.) On November 1, “almost $55 billion for Social Security, Medicare, veterans benefits, military pay, and military retirement benefits,” will come due, the group explains. At that point, our bills will inevitably overwhelm our ability to pay them unless the debt ceiling is raised.

(Courtesy of Bipartisan Policy Center)

Why do some Republicans keep saying that we would never default, even if we breached the debt ceiling?

First, there are conflicting interpretations of what “default” really means.

Generally speaking, financial institutions define default in a narrow technical sense: a missed interest payment on its sovereign debt. If the debt-limit isn’t raised, the government is widely expected to do everything it can to make those payments to bondholders and avoid technical default.

Before the shutdown, House Republicans passed a bill to try to ensure the government would have the legal authority to “prioritize” these payments over others. That’s prompted some GOP conservatives to claim that default is a myth, touting a recent proclamation by Moody’s CEO that “it is extremely unlikely that the Treasury is not going to continue to pay on those securities.” Deutsch Bank has placed the likelihood of that scenario at zero percent. 

But it’s not clear whether prioritization is technically and legally possible, given how Treasury payment systems are set up. And many argue that it’s a distinction without a real difference.

Outside Wall Street, “default” has taken on a broader meaning: a missed payment to anyone that the government owes money to, whether it’s through a Social Security check, a Medicare doctor’s reimbursement, a tax refund, or a federal employee’s paycheck. Missing those payments wouldn’t mean that the government technically defaulted if we continued to pay interest on our sovereign debt.

So would we be OK if we didn’t technically default? Couldn’t we just give IOUs to the other folks and pay our bondholders?

That would still deal a serious blow to our creditworthiness and our economy. Investors’ confidence in U.S. debt would plunge, even if bondholders were still paid.

Economists also point out that even if we prioritized our interest payments, the other missed payments mean that government spending would suddenly crater.

After Oct. 17, we’d have enough revenues to pay for only 65% of payments that came due in the following month, according to Goldman Sachs’s calculations. If the government cut down its spending rapidly to try to make up for that difference, economic growth would be devastated as that spending was pulled back.

Could we keep prioritizing payments and “go indefinitely without hitting default,” as Rep. Steve King said?

It’s very unlikely. If prioritization worked—and that’s a really big if—there would theoretically be enough revenue to pay just our bondholders. But in order to sustain these payments “indefinitely, ” we would need a robust stream of buyers for U.S. debt. And if we breached the debt ceiling, it’s unlikely that investor confidence in our sovereign debt would remain so high.

How would a debt-ceiling breach affect ordinary Americans?

Borrowing costs would immediately rise for home buyers, business owners, and the government. The stock market would plummet. Government benefits and other payments would be jeopardized, and many thousands of jobs could be lost.  Oh, and it could catalyze another global financial crisis that some believe would dwarf the 2009 meltdown.

How nervous are investors about all of this?

An apparent thaw in the budget negotiations led to a stock market rally at the end of last week.

But the concern is real. The yield on US Treasurys—which goes up when investors believe that US debt is becoming more risky—has started to rise to levels we haven’t seen in years. Already, rates for one-month Treasury bills spiked to the highest level since the financial crisis in 2008. That means that borrowing costs for the government—financed by taxpayers—have already gone up.

So debt-limit brinksmanship is already costing us money?

Yep. In 2011, the debt-ceiling negotiations cost taxpayers $1.3 billion in that year alone as government borrowing costs rose, according to the Government Accountability Office. Over the next ten years, the Bipartisan Policy Center estimates that the cost will end up being $19 billion.