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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imbrbing's picture

Bingo, always have to keep the clown shows going till the last minute, it has worked so far.

fonzannoon's picture

congress folds early. debt limit raised. no sequester. market rallies. interest rates drop. happy times.


Al Huxley's picture

Not so fast my friend.  'Sequestration's just started it's run.  We'll need several episodes to make it to the end of the season.

rubearish10's picture

Hey, never mind all this BS, Apple is back over $500 in a radical technical oversold Beyonce'

Nid's picture

Hey look, the Stock Market is up....

imbrbing's picture

over there! over there! up in the sky! is it a plane? is it a bird? NO, its SuperMarket! Able to leap tall stacks of cash in a single bound!

adr's picture

I prefer the hope that asteroid NEA 2012da14 will in fact enter the atmosphere and hit Washington DC, perhaps a few pieces could break off and hit Blankfein's car, find Corzine, and take out the top floor of each skyscraper in NY.

There is hope right?

Perhaps the rock could hit the ISS, which could fall out of orbit and hit the Capital and bounce to the White House.

Dr. Engali's picture

Preferably during the state of the union address.

Cognitive Dissonance's picture

Don't you mean the "State of the Police State" address?

Uchtdorf's picture

And a building in Bluffdale, UT?

sunaJ's picture

Your name and avatar, I see what you did there.  Welcome, brother.

bnbdnb's picture

Social Security / Medicare are solvent. Those will be paid first.



Nid's picture

It's a Trust Fund, don't you know....

bnbdnb's picture

Yep. Obama told me so.

Bullwinkle Moose's picture

He also said "we are not a deadbeat nation."

youngman's picture

As much as i want this to turn things never will...the Politicians will never make that tough hard choice...Never

this will never get cut until it falls apart...and someday it will...the dollars will become worthless....I would love to see the Politicians cut 1 trillion of real spending this know...30% cut in medicare...Social Security...Medicaid...foreign Aid...stupid programs at home...EPA...Education departments..1000´s of programs ....but it will never happen......JUST YESTERDAY they approved 51 billion in unfunded aid to the east coast...filled with junk...just its print on...until it just becomes a farce....and that is now sooner rather than later

Ham-bone's picture

Hate to say it but mid Feb looks to be a seminal moment with so many assets at final support or blow off top position -

Dollar on five year support line...commitment to maintain the flow could be the "inflationary match" the Fed so covets...

Equities on 4 year wedge consolidation (break up or down)...will equities follow transports to Dow 15k and then 20k, looks possible based on DJT?  Or down w/ Nasdapple 100 HS?

Treasuries attempting after collapsing from a 30yr falling channel now attempting to regain the channel.

One of these will pop with next February's decision (to spend or not to spend or somewhere in the middle).  The system has no further stretch without something breaking.

Smuckers's picture

Why does grabbing my ankles not feel or look as good as those retro 20-minute workout videos?


lolmao500's picture

So what's you're saying is that it'll be hilarious when the US turns into Greece?

Odd Ball's picture

Never happen - the US has tons of trees to burn for heat and cooking

Spastica Rex's picture

The Republicans are going to stand their ground this time!

Nah, just kidding.

Dr. Engali's picture

Republicans standing their ground....that's almost as funny as Cramer getting a stock pick right.

AgAu_man's picture

"Caesar!  Beware the Ides of March!" -- Shakespeare's "Julius Caeser"

TideFighter's picture

When I needed tuition for grad school I went to work in a meat packing plant.

Fast paced, meat coming down the line like Jap soldiers. One fellow standing next to me

said we were being overrun; we would need to put five hams in the boxes instead of four, just to catch up.

Obviously, five hams will not fit in a four ham box, but I gave it my all. I smashed those hams, crammed those hams

in, but to no avail. The fellow said run upstairs and ask management for a box stretcher. I bit. They laughed.


lolmao500's picture

Obama : but but but it's for the childrenz!

"The state must declare the child to be the most precious treasure of the people. As long as the government is perceived as working for the benefit of the children, the people will happily endure almost any curtailment of liberty and almost any deprivation."

--- Adolph Hitler, Mein Kampf

faustian bargain's picture

Yikes, haven't seen that quote before. *shudder*

Al Huxley's picture

Man, that fucker and his buddy Goebbels - they wrote the playbook for most of what's happening these days.  What's the matter with our politicos?  They so fucking lame they have to keep going back to shit that's almost a hundred years old now?  Don't they have anything new they can show us?  Lazy fucks.

dirtyfiles's picture

yes US congress will switch monetary vehicles to convertible
or simply cabriolets as most folks understand better that means no roofs or simply no spending limits...go wild

rsnoble's picture

I'm pretty much to the point of saying fuck it let's just default and get it over.  This day by day, week by week, month by month insanity has everyone on edge.  It's probably costing more out of fear than the actual event lol.

Al Huxley's picture

Its the source of daily political and fiscal drama for that segment of the population that gives a shit about those things - why would they cancel it.  Fuck, 'Fiscal Cliff' was a huge hit, I don't see why 'Sequestration' won't do just as well.   Who would cancel the most popular shows in their lineup?  Then all we'd have left to watch would be 'Gun Control'.

forwardho's picture

It seems you have arrived at the meme of the week club.


Or my personal favorite; Watch the wiggling fingers on my left hand, while i stuff a cactus up your rectum with my right.

Zap Powerz's picture


Sadly, very few people are paying attention so very few people feel the insanity and are actually on edge.

The VAAST majority of the US public is totally unaware of this problem.  In fact, the recent election would indicate they think everything is just great!  Lets keep this partying going!

So, while you and I are stressed about it, hardly anyone else is and that is a huge problem.

Mad Mohel's picture

We've been defaulted since Nixon hammered in the last nail and killed real money. Most people just haven't realized it yet.

Now if you asked, when will people realize that the US has been in default? Well that could go on indefinitely, especially if these broads keep cranking out Honey Boo Boo type broods.

faustian bargain's picture

To paraphrase the popular quote: "To save the country, we're going to have to destroy the government."

Zap Powerz's picture

Those are nice DHS agents dressed in SWAT gear knocking on your door.

Free speech FTW!

irie1029's picture

I say do whatever you can NOT to spend money on anything taxable just to keep it out of there worthless hands.  Maybe a working peoples strike for 1 week. 

Al Huxley's picture

Fuck it - As I vaguely recall, Greece had some issues pretty damn similar to this, and everything worked out fine for them.  I'm sure if we just ignore the problem it will go away.

RougeUnderwriter's picture

I can't be out of money - there are still checks in my checkbook!

Al Huxley's picture

Reminds me of the Jeff Foxworthy joke - 'Oh you want check?  No problem, I thought you wanted money...'

kito's picture

shit, these are just the extraordinary measures...............what about the plans for the extraordinarily extraordinary measures that are in the planbook............

a)  govt replacing all of those risky equity based 401k/iras with safe treasuries...

b) strict capital controls

c) 90 pct tax on the sale/possession/purchase of gold and silver

d) eminent domain over all agriculture/livestock facilities.............................

and much much far as the imagination can take you!!!!!!!!!!!!!!!!!!!!!!!!


Cognitive Dissonance's picture

Agreed! Plenty of wiggle room left before the peak insanity ceiling is hit.

TraderTimm's picture

It would be funny if 75% of the USA filed for an extension this year, instead of paying up right away.

NoDebt's picture

That's what the government living within their means actually looks like.  A testament to how far off track things have gone that just cutting spending to "break-even with tax revenues" looks like hell on Earth will be unleashed.

Greece found out the hard way.  We will too, someday.  But that day will not be today.  Nor will it be in February.


Miramanee's picture
What Happens After The US "Default"? nothing
hooligan2009's picture

kangaroo court are right, nothing.

when the "matrix" goes..people starve, mortgages are forgiven, banks and stock markets are toast (no debts), no drugs, no police, no pentagon, no schools, no air traffic, no parks, no health inspections, etc etc unless everyone volunteers or there is a contignecy plan to run up salary iou's, food stamp credits in some sort of account system.

Black Markets's picture

All of the above...

OR mint the $1T coin.

On a serious note the US government won't miss payments. Republicans will start to "disappear" before that happens.

I think the USA needs a good Coup d'état. Spread the word.

silverserfer's picture

the drug dealer is holding a gun to his own head threatening to shoot himslef if he doenst give himself more drugs. I dont see where the uncertanty is with what is going to happen?

eddiebe's picture

So this means I go long T bonds right?