Republican Kevin McCarthy Says No Debt Deal Likely Today, Or Over Weekend: Treasury Now Projected To Have -$15.5BN Cash Balance On August 15 $31BN Coupon Date
Well, it looks like there will be no debt ceiling hike enacted prior to August 2 at which point the money really does run out. From The Hill: "The No. 3 Republican in the House said Thursday night that he didn’t expect any surprises in the deficit debate over the weekend. “I do not see something springing this weekend,” Republican Whip Kevin McCarthy (Calif.) told conservative radio host Hugh Hewitt. McCarthy pooh-poohed reports that the White House and Republican leadership are closing fast on a deal on the budget deficit and raising the debt ceiling. “There is no deal,” McCarthy said, using the same phrase used by the White House and House Speaker John Boehner (R-Ohio) following reports they were nearing a deal on Thursday. McCarthy said Republicans would not rush to push a bill through in order to meet the Treasury Department’s Aug. 2 deadline. According to McCarthy, House Republicans will seek to follow their own “three-day rule” in order to allow members of Congress to debate the plan.
And the kicker:
“As a member of Congress, I’m going to want to read all the way through it,” McCarthy said. “And if you think this conference is going to go vote on something willy-nilly, they will not.”
McCarthy said he would expect any legislation related to the debt ceiling or deficit to spend those three days in the House and “at least three or five days” in the Senate.
Republicans will not be like the Democrats and “run it right to the floor,” McCarthy said
Now the reason why this is bad is because as Stone McCarthy calculates, "we expect Treasury to have less cash in early August than we thought previously." And here is where it gets very tricky since the money generating machinery won't be in place on time: "we now show Treasury with a negative cash balance of $15.5 billion on August 15, which implies that Treasury wouldn't have the resources to pay $30.6 billion in interest on that day."
SMRA has more:
At this point, we expect Treasury to have less cash in early August than we thought previously.
In mid May, for instance, we thought Treasury would open the day on August 2 with cash of about $85.0 billion. (See Chart of the Day: Imagining an August Without Borrowing, 5/20/11.)
The main reason for the lower cash balance is that Treasury has been issuing much less in bills than we had been expecting. In retrospect, we should have paid more attention to our own forecast that Treasury wouldn't be able to settle the July 2-, 5- and 7-year notes on August 1, without violating the debt limit. In late April, for instance, we projected that the settlement of those auctions would cause Treasury to violate the debt limit by about $24.0 billion.
What Treasury has done is to keep bill auction sizes lower than it would have otherwise to accommodate the settlement of those auctions, which were announced today and kept at their recent sizes. We think that explains the $4.0 billion cut in the 52-week bill announced today. Once the debt limit is increased, we think the Treasury will be ramping up bill auction sizes pretty aggressively. We will discuss that in more detail next week in our projections of Treasury borrowing needs for the next two quarters.
The table above summarizes our cash flow projections for the first two weeks of August, assuming that there has been no increase in the debt ceiling. The projections assume that Treasury will be able to at least roll over maturing debt on August 4, 11 and 15. That's probably becoming a more questionable assumption given all of the statements coming from the rating agencies. As the table shows, we now show Treasury with a negative cash balance of $15.5 billion on August 15, which implies that Treasury wouldn't have the resources to pay $30.6 billion in interest on that day.
If our projections are fairly accurate at this point, we still think the Treasury has enough options available to scrape together the extra cash to make the interest payment. Treasury has provided less detailed information than we would like on how much of its extraordinary measures it has used to create borrowing authority. Last Friday, Treasury announced that it would suspend the reinvestment of securities issued to the Exchange Stabilization Fund, and that by doing so, it was using the "last of the four previously announced measures available to keep our nation under the statutory debt limit."
Where can Tim Geithner squeeze a few last pennies from?
Again, Treasury hasn't been all that explicit about how much of each option has been used. But we're going to assume that, by August 2, it will have used all of the borrowing authority created by measures related to the Civil Service Retirement and Disability Fund, the G-Fund, and the Exchange Stabilization Fund. That would leave $5.0 billion that could be created by redeeming the remaining $5.0 billion in bills in the Supplementary Financing Program Account. An announcement regarding SFP could come on Monday.
Treasury could also replace some Treasuries held by the Civil Service fund with debt of the Federal Financing Bank, which would create about $4.8 billion in borrowing authority. Treasury has given short shrift in various statements about using the Federal Financing Bank, saying it wouldn't create a significant amount of borrowing authority. But if you're trying to scrape together $15.5 billion to make an interest payment, $4.8 billion gets you 30% of the way there.
Finally, if Congress hasn't increased the debt limit by August 2, Treasury Secretary Geithner would be on solid ground in extending the length of the Debt Issuance Suspension Period (DISP), which would allow Treasury to make further use of the CSRDF. Declaring that he expected the DISP to last another month, for instance, would provide Treasury immediately with another $6.0 billion in borrowing authority.
In sum, Treasury is going to start August with less cash than we thought previously. We still think Treasury could probably pay its obligations through August 15, but it's become a much closer call.
Bottom line: if there really is no debt deal today, the August 15 coupon payment is looking increasingly shaky.
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