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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hooligan2009's picture

T bones....there ..should see you through to the other side in ten years if you have a HUGE freezer

Northeaster's picture

Zero Hedge has posted some really decent data over the years. Like the incredible and insightful posters of days gone by, the one question that to this day no one can ever answer is: "When does this implode?"

In just this past decade we have witnessed our government engage in spectacular fraud and financial & legal shenanigans. There shouldn't be any question that this practice will continue no matter what limits the data show us.

While some wish for "whatever bad things to come", I think people have and will continue to underestimate at the lengths the government will go to come up with evermore incredible fraud and lack of accountability. I wish this wasn't so, but until people, not Party, are elected to office, it will continue to be status quo. Even then, it may be too late to matter.

As others have mentioned, as well as Zero Hedge (and elsewhere), we truly live in a Banana Republic. Unfortunately there are many people that can't accept this paradigm for whatever reason, it really doesn't matter. Going forward, the bad things happening to this country will never be viewed on what is as close as one can get to state run television championed as "free" or impartial.

In any event, I certainly don't have the ultimate answers, but I do appreciate some of the works Zero Hedge posts. However, I do miss the industry insiders that used to post here years ago.

Milton Waddams's picture

The industry insiders disappeared when they realized that their mea culpa was premature.

Darth Rayne's picture

Come on America, default. No-one else has the balls.

By balls I mean that your military is (slightly) bigger than the rest of the worlds military combined.


Do it. Do it! DO IT!

yogibear's picture

Start taxing ROTH withdrawals if the US government gets desperate.

viahj's picture

haha, fooled them...invested in FB and HBLF

yogibear's picture

Wonder why countries are pulling their gold?

Random_Robert's picture

The most politically palatable option for Washington DC will be to eventually remove the debt ceiling altogether...

Therefore, that is what will happen in the near future.

It's not the right thing to do by any means, but since no one can assign a fixed "tipover date" to a potential hyperinflation event, the odds say that they will set the stage for this eventual likelihood, versus setting up the more immediate likelihood of a cash run, social chaos and economic collapse if they go with option B and begin forcing the Treasury to pay as it goes...


I'm reminded of the stories of German potato farmers who paid off the entire mortgage on their farms with the income from the 1922 harvest alone.


Who would have thought that potatos could out-compete banknotes as money, and still taste so fucking awesome when fried up and dipped in ketchup...?

lolmao500's picture

So I was talking to these Obozos the other day... they said deficits are no big deal because the interest on the debt will always be low... and when/IF by some miracle the went back up, that would ONLY mean that the US economy is doing great again, meaning the taxes income would be so high, there would be no more deficit and paying the interest on the debt would be very easy!

They think that interest rates going up while the US is in the dumps is impossible... They think a loss in confidence is a conspiracy theory. They think Bondzilla is just a legend.

Vet4RonPaul's picture

What will happen on D day is that lenders will better realize what it means to have lent money to someone that you can't really collect from ...... oh crap for them.  There is not a country or group on earth that can collect against the USA's will.  Meanwhile, the USA can collect what it is owed (or not!) quite well thank-you very much.  Our military provids us significant value in this regard.

pupton's picture

Let this chart sink in. This is the one above that really stuck with me.  What kind of AAA rated entity has a statement of cash flows like this???

None!  Got silver - bizitchez!

Sigep0612's picture

Noted economist Herbert Stein Law   "If something can not go on forever, it will stop."  

"Carpe Diem!  Rejoice while you are alive; enjoy the day; live life to the fullest; make the most of what you have.  It is later than you think." -Horace, Ancient Roman Poet 

"In the land of the blind, the one eyed man is king"  -Erasmus


Pumpkin's picture

Good Lord, more drama for the sheep!

Gimleteye's picture

Debt Ceiling will be removed permanently, Coup of the Constiution will be nearly complete, Secession is the better altrnative--The CSA (Conservative States of America) form from the Red states, offer payment to the Blue States for military/federal installations. Any federal personnel can leave, resign and become a CSA citizen or seek dual citizenship. Since the CSA is a new country ZERO dollars go to the former USA as income taxes. CSA imposes a flat tax of 10% on all money(no captial gains, etc, all money--thus Buffet, should he stay, pays 100M and Joe Shmoe who earns a dollar pays .10) If companies go where taxes are low, within six months the CSA should be booming since there would be NO corporate or business taxes at all. Will there be fighting, some probabaly but I think many Redstaters living in Blue states would flock to the CSA and many military would resign from USA and join expertise to CSA. Would Obama find a shmuck sergeant to jump up to General and order war, maybe, but somehow I think he would be hustled off to Camp Davd for his own protection from angry mobs and never be seen until his trial for treason.

The Confederacy should have offered to buy Fort Sumter, Lincoln would have ben in a quandry. The might of the north made the right of unity by winning the argument through force.

hooligan2009's picture

the debt ceiling is a joke..i still chuckle when i hear the examples used by the prez that its like eating your food then deciding not to pay for your meal. the debt ceiling is like eating your food and giving yourself an increase to your credit limit without bothering to ask Mastercard/Visa/Amex whether its alright with them. I guess the Fed is the credit card company.

DollarDive's picture

Algeria Ranked 23 on World Gold Holdings...... lots of interest there lately.

lolmao500's picture

Bullish for popcorn.

Landrew's picture

One item that is wrong in this post. Social Security will not have problems. Social Security now that the return to normal tax will have a small surplus this year and will pay all benefits regardless of what the budget is. I wonder why the home work wasn't done on this article?

hooligan2009's picture

the social security tax is back-dated or do you mean that it won't have problems in these two months because the (2%?) rebate was "fiscally cliffed"?

bnbdnb's picture

But Obama told me that SS checks won't go out unless the debt ceiling is raised.

SmittyinLA's picture

default isn't the problem, non-default is. 

DCon's picture

Can the US just pay German gold insrtead of interest


buy the gold back next year!



FinalCollapse's picture

Feb will buy $500B of Treasuries and they will roll this debt. Rolling will not increase the outstanding debt. 

I wonder if Fed can pay all USGOV bills by minting dollars. This would stir a major shit in DC.

Eventualy this 'in your face' politics must end some day. I wonder what will take for both sides to mature up.

hooligan2009's picture

you mean monetize the debt by "paying" for new US treasuries with part of the Fed's 1.6 trillion of long-dated treasuries?

hooligan2009's picture

Am I reading this right? The Bipartisan Policy Center is estimating the "X" date to be between the 15th Feb and 15 March 2013?

By my estimates is the 15th Feb, mind you I have no idea what "calendarization" is or how it allows for wiggle room.

From here: if you download the monthly spreadsheet, you have these deficits for the months of January, February and March for 2010, 2011 and 2012.

Januaries     42,634     49,796 and    27,407

Februaries 220,909   222,507 and 231,677

Marches       65,387  188,154  and 198,157

out of interest, calendar year deficits - outlays for 2010, 2011 and 2012 are $1,162bn   $736bn and $ a massive drop (no idea how that works, but these are the "official" numbers).

$200 billion in net outgoings runs out on 21 February (15 working days out of 20 working days) even if we have just a monthly deficit of $25 bn in January 2013, since there is likely to be a February 2013 run rate of c. $225 billion. 

21 Feb 2013 is 37 working days from tomorrow.

lasvegaspersona's picture

The obvious: more has been promised than can be delivered. It is the only way to get elected in these times.

Bob Sacamano's picture

STOP.  There is no default going to happen.  There is more than enough to cover debt service.  We are talking about reducing future spending.  That is not a default.  Please stop buying into the MSM, leftist scare tactic rhetoric.  Americans are really stupid folks for believing this stuff. 

hooligan2009's picture

does rather beg the point..the 435 + 100 + 1 are the leaders..if they say..let's fiddle while rome burns..maybe people should just stick close to the rivers and lakes and do the same

hooligan2009's picture

ponders why they don't do the market value of the debt...or its PV01...the debt ceiling only refers to nominal on issue..its market value is what? already 5% or 800 billion more than that?

q99x2's picture

The Bernank print ya up a fix. Not to worry.

richard007's picture

Bible Prophecy - Habakkuk 2:7: The Day of Reckoning comes just after the Iran War when US creditors stop lending the IUS money.


Bible Prophecy! This will happen soon, possibly even this year 2013.