Crossing Through The "X Date" - What Happens After The US "Default"?

Tyler Durden's picture

Call it "X Date", call it "D(elinquent/efault)-Day", call it what you will: it is simply the day past which the US government will no longer be able to rely on "extraordinary measures" to delay the day of reckoning, and will be unable to pay all its bills without recourse to additional debt. It is not the day when the US defaults, at least not defaults on its debt. It will begin "defaulting" on various financial obligations, such as not paying due bills on time and in full, but since this is something Europe's periphery has been doing for years, it is hardly catastrophic. 

As a reminder, the technical definition of default is being unable to pay the interest or maturity on one's debt - for the US this is not an issue (at least not for the near term), as the revenues brought in by taxes more than cover cash interest requirements. It is, however, the day past which the US government will slowly but surely have to begin shutting down non-vital services and cut spending for non-core services, as it is forced to begin prioritizing who gets what from the remaining money. In short: it the day when America has no choice but to live within its means (no wonder the crank spending to infinity "Magic Money Tree" brigade - the same that has no idea that IRR on government "investments" is always below zero, is screaming bloody murder).

And while we have done the full analysis some 18 months ago when the US found itself in the exact same place, it is time for a refresh of precisely what the next steps are if, some time after the second half of February, there is still no debt ceiling resolution, and the "catastrophic outcome" (in the words of Tim Geithner) becomes reality.

First, as everyone knows, the US hit its debt ceiling on December 31, and has since been utilizing some $200 billion in Extraordinary Measure to stave off X Date. The exact same thing happened on May 15, 2011, when for three and a half months, until August 2, the government used the same delay tactic. Alas, this time around there is only 1 - 1.5 months in "extraordinary" dry powder time, because, as the Bipartisan Policy Center politely puts it, "February is a “bad” month for the federal government’s finances" and "Fewer measures available" (one does wonder just what month is "good" for federal finances when the US government is burning over $1 trillion a year but that's a different story).

The $200 billion in "Extraordinary Measures" are summarized as follows:

In other words, the government will basically defund yet more retirees in exchange for another IOU. And how long will this strategy go for? Not too long. As the chart below shows, the drama will end some time between February 15 and March 1, depending on inflows, and the calendarization of expenditures:

Once the $201 billion, consisting primarily of plundering the government retirement G-fund, runs out, the Treasury has two options:

  • Remaining cash on hand (including any leftover funds from the emergency $201 b)
  • Daily cash inflows (federal revenues received each day)

Since there will be virtually no cash on hand, absent some much more drastic measures, such as selling the Treasury's gold, Jack Lew will have to make do with spending what he makes: i.e., tax revenues.

And here comes the rub, because should we get to T+1, we will be in history territory, as "There is no precedent; all other debt limit impasses have been resolved without reaching the X Date. Treasury has never failed during a debt limit impasse to meet a payment obligation." No precedent?  Kinda like the Fed injecting $3 trillion into the stock market...

None other than the Chairsatan has chimed in: "[Going past the X Date] would no doubt have a very adverse effect very quickly on the recovery. I'm quite certain of that.”

So what will happen, assuming the world does not end? Simple: prioritization. To wit:

If we reach the X Date, Treasury might either prioritize payments or make full days’ worth of payments once they receive sufficient revenues to cover all of a day’s obligations.

  • Interest on the federal debt would likely be prioritized in either scenario.

Scenario # 1: Pay some bills, but not others

  • Treasury might attempt to prioritize some types of payments over others. Prioritized payments would be made on time, others would not.
  • Uncertain legality (no precedent)
  • Unclear if it is feasible, given the design of Treasury’s computer systems

Scenario # 2: Make all of each day’s payments together once enough cash is available

  • Treasury might wait until enough revenue is deposited to cover an entire day’s payments, and then make all of those payments at once.
    • (For example, upon reaching the X date, it might take two days of revenue collections to raise enough cash to make all of the payments due on day one. Thus, the first day’s payments would be made one day late. This, of course, would delay the second day’s payments to a later day.)

The issue, under scenario 1, is that the Treasury would have to choose and sort between 100 million monthly payments, and that roughly 40% of the funds owed for the month would go unpaid. As the chart below shows, of the 20 business days between February 15 and March 15 2013, there is a $175 billion deficit, 40% of the total outflows of $452 billion.

Specifically, the Yes/No option means that should the government pay these bills:

It won't be able to pay these bills:

For those who enjoy micromanagement, here is the two week daily cash flow forecast from February 15 to March 1, showing inflows and, mostly, outflows, in the period under discussion. Keep in mind that should the debt ceiling not be resolved in this 15 day period, the same cash flow analysis, usually done by bankruptcy consultants at the corporate level, will have to be extended on a month to month basis:

Yet the reality that while manageable, payments will quickly become problematic, especially for Social Security, Medicare, Medicaid, Defense, military, etc, as group after group scrambles to demand priority in order of payment.

In effect, the US will become one ongoing bankruptcy assignment, where the various impaired unsecured creditors will demand a right of superpriority. It is unclear which bankruptcy court they can voice their objections to, however.

* * *

But perhaps the biggest threat for the US when it crosses the X Date is not so much the debt interest, nor the prioritization of payments, but the roll over risk of some $500 billion in debt maturing between February 15 and March 15! That's right - recall that when it comes to the US debt, it is the ever greater frontloading of short-term maturities that amplify the interest rate risk facing the country. And while interest rates are likely to explode across the curve, what is virtually assured is that the rolling of the half trillion in debt will become impossible due to lack of funding, and the inability to find buyers of matched short-term debt to roll the retiring paper, in an environment in which suddenly it is unclear if even 4 week Bills will be money good. And for all those predicting a failed Treasury auction, this will be your time to shine, as it is unclear if even full direct and outright monetization of ultra short term debt by the Fed will be enough to get piggyback buyers on paper whose rate of return is so low as to not justify the risk of exposure to a real deal maturity non-payment default.

What else will happen? the BPS has some other ideas:

Additional borrowing costs for the federal government from delay in increasing the debt limit

  • Additional rating agency downgrades are possible
  • S&P downgraded last summer and reaction was not severe
  • But there is uncertainty about effects of another downgrade since many funds are prohibited from holding non-AAA securities

Market risks beyond the X Date:

  • Treasury market, interest rates
  • Potential for serious equity market reaction (401(k)s, IRAs, other pensions)
  • Our economy
  • The global financial system

No guarantee of the outcome; risks are risks

In other words: while it is not the end of the world, what would happen on Day 1 (2, 3, etc) is the sudden realization that the game is, indeed, over, and that little by little everyone's head will have to be pulled out of the ponzi sand.

* * *
Finally, and perhaps most disturbingly, because realistically Congress will come to a compromise, even if it means 2-3 days of payment defaults, even if it means the early onset of the sequester, which together with the payroll tax cut expiration, would mean recession for the US as explained previously, is the final chart in the BPC presentation, which shows just how much the US debt ceiling will have to be increased by to get the country through the end of 2013 and 2014. The answer? See below:

That's right: we are looking at 2 more years of $1 trillion+ deficits, which means by January 1, 2015, there will have been 6 years in a row of $1 trillion deficits.

Sadly, "Banana republic" does not even come close to doing this country justice.

Source: Bipartisan Policy Center

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mayhem_korner's picture



Looks like tax refunds will be coming sometime in...

a) July

b) September

c) they won't

flacon's picture

Paying tax refunds in special government IOU's would be a good idea from their standpoint. It would be more likely that people would use these new dollar IOU's. Plus it puts the empty promises back into the hands of the people making them the bag-holders. The worst way to screw the people will the the path that is chosen. 

Chuck Norris's picture

Isn't the dollar already an IOU? 

Snakeeyes's picture

Great post! But don't worry. Boehner and McConnell are RINOs and will cave. Particularly after "Dis Man" (Obama) and the media demonizes them.

Groundhog Day's picture

They will raise it by 500 billion so they can have this charade every few months.  Their logic is, everytime they finally come to some 11th hour agreement the market rallies 5-7%, do this 2-3 times a year and we can live in perpetual bliss.

Kitler's picture

The question NEVER asked when Rumsfeld announced that the Pentagon could not account for $2.3 trillion in spending from fiscal 1996-2001 (the day before the 9/11 attacks) was:


The total declared budget during that period was $1.6 trillion and most of that can be easily accounted for in personnel costs, equipment purchases. fuel and other easy to track expenses.

The answer of course is that only G-D could have loaned them the extra $2.3 trillion. G-D of course meaning the Federal Reserve. Remember the skids of $100 bills in Bahgdad used to buy off the Iraqis?

Well it's even worse than that and it's all off balance sheet.

I doubt a couple of hundred extra billion (or even a couple of trillion) will be noticed when it magically appears from cuts or some other lame excuse...

Muppet Pimp's picture

The R's have one last opportunity for redemption on deck.  We shall see who cares about 'we the people' in short order.  History is about to be made either way, lets see if they fold like cheap suits again.  If they do the republican party will split for all intents and purposes.  If they stand firm against tyranny history will reflect kindly on them (regardless of any short term posturing by the commies). 

Texas Ginslinger's picture

Forget the USA default thing.

AAPL is back over 500.

Reggie must have deflated.

eatthebanksters's picture

Can you imagine how loud the CEOs and Directors of the TBTF banks are screaming?  Can you hear the 'cha ching' sound of their lobbyists time/billing sheets? Can you hear Dimon and Blankfein promising to take the world down with them?  I hope someone in Congress has the balls to let this shit hit the fan so ll this bad stuff can finally be cleaned out.  Then that stupid self righteous fucker named Barry wiil own this shit and his grand legacy will be how he fucked up the world because he was an arrogant narcissist that thought he could do no wrong.  Guess what, everyone who is screaming about equality will finaly have it.  Hope they have guns, food and friends. 

economics9698's picture

Bernanke already has the paper work done on the new print.

JLee2027's picture

Yes, beware the ides of February.

Chupacabra-322's picture

“When all else loses, they take you to war.” -Gerald Celente

CPL's picture

Beware the Ides of March...

Charles Wilson's picture

But there are a few Caesars who are still worshipped.

Day in and day out.



q99x2's picture

It's recursive rehypothecation and somewhere down inside one of those fractals is your tax refund.

adr's picture

A tax refund is money that they shouldn't have taken in the first place. if you get a refund because you make next to nothing, well that money wasn't even yours in the first place.

Claim five deductions and keep your money every month. If the useless eaters don't get their welfare, so be it. If you're dumb enough to let them withhold too much from your paycheck, you shouldn't get it back.

Joe Davola's picture

The man tends not to be too happy if you're underwithholding.

IndicaTive's picture

If you're on monthly/quarterly bonus and commission it's nearly impossible (if not impossible) to adjust your withholding to keep more of your money on payday. They take 25% (I think) regardless.

NoDebt's picture

Do it anyway.  If you're getting a refund you're paying too much throughout the year.

koaj's picture

i got hit with a big fat underpayment tax bill for refunds the last few years have helped pay that down. i am self employed and pay qtrly even if its a few hundred bucks. i dont want that damn headache again

Abitdodgie's picture

If you are dumb enough to pay taxes in the first place you should not get anything back. Fixed it

Hippocratic Oaf's picture

You'll get an IOU with one of those bulk rate stamps from the bankrupt post office

Pool Shark's picture



Which is why you never let the government get ahead of you; always arrange to pay the most you can on April 15th without penalties or interest.

Otherwise, you are giving the government an interest-free loan. Starve the beast!

[come to think of it; I think I'll declare my own budget ceiling on April 14th and have to start rationing payments - I guess Uncle Sam might have to wait a bit for that "contribution"...]


GolfHatesMe's picture

Owing a bunch also puts the breaks on someone stealing your identity and trying to file for your refund.  Works like a charm.

oldman's picture

Pool Shark

Good comment, but it begs the question:

Why would any entity that owe taxes to a bankrupt government, pay those taxes rather than filing for legal extensions?

Just a question that occurred to me        thanks          om

Maybe, someone out there in ZH land knows what happened in the case of Greece, same snake, right?

Sean7k's picture

Legal extensions allow you to file later, but if you fail to deposit enough by DEC 31st, you will be fined and flayed.

in-Credible Banker's picture

Is anyone even focusing on the sheer SIZE of these numbers?  Man....when this is gonna be EPIC!

CaptainSpaulding's picture

Why is R&G Brenner still around then? My tax preparer called me the other day to set up an appointment. I told him i will be "Unavailable " this year

Chump's picture


My original comment had been covered already plenty.  It pays to read, folks.

ptoemmes's picture

A tax refund is just a no interest loan to the gummint.


Yeah - I like them too ;-)

CPL's picture

I really wouldn't get your hopes up for a refund.  In Europe remember they canceled nearly everything after Greeks, Italians and Spainards filed.  


Basically the old bait and switch.  Two months later ZH was posting pictures of the Greek FinMin HQ.  Try not to hold your breath on the return, there is no script other than snatch and grab now.

koaj's picture

sounds like Kalifornistan

HomeBrewPrepper's picture

But I thought taxing the rich fixed all this... (Sarc)

We are all screwed, at least we can see it coming and prepare as best we can

SheepDog-One's picture

Um...HEY I got it! Let's pass new massive govt legislation and start up vast NEW agencies! That should get us out of our bankruptcy troubles, just make everyone a goobermint employee!

fuu's picture

Dude think of all the jobs! 15,000 new cops!

HomeBrewPrepper's picture

We first need a special advisory panel to test the effect it would have on global warming. But you are onto something.

Jack of All Trades's picture

X Date will never be reached.  Our "leaders" in Congress will increase (or just eliminate) the debt ceiling and agree to unspecified, non-binding, back-loaded spending cuts. . .


They can take away guns under the guise of "protecting children" on the one hand while absolutely screwing the children and future generations with unconscionable debt.



Ham-bone's picture

Funny thing (in the non-laughing sense) is noted when looking at the resistance / support lines from March '09 to now.  They converge in mid Feb at about just so happens that is where a four year wedge ends.  Upward trending resistance has been in place and holding at every peak since early '11.  Hmmm, must just be some strange coincidence???

Cognitive Dissonance's picture

I can't wait until Uncle Sam starts hitting up people on the street for any spare change.

<Hey buddy, can you spare this old veteran enough money for a new war?>

Dr. Engali's picture

This is a silly argument. The U.S is not going to default. The debt ceiling will be raised and we will keep paying our bills with the Bernank's funny money.

Spastica Rex's picture

"Sailors, fighting in the dance hall."

Freakiest show, and whatnot.


Id fight Gandhi's picture

Exactly. The argument is masterbation. Just raise the ceiling, pile on the debt, print more money, put off the tough decisions.

The argument makes the policy makers still believe they can change anything.

Al Huxley's picture

Hey!  Not everybody's seen the ending, don't give it a way for them, or they might not bother watching the show.

auric1234's picture

That is, until the funny money is no longer being accepted.