The Debt-Ceiling Fight "Could Get Ugly" - Key Dates And Implications

Tyler Durden's picture

Even though there is no technical link between the two main fiscal issues – the continuing resolution (CR) and the debt ceiling bill - there is a link in the minds of market participants because prompt resolution of the CR could spell a favorable outcome for the debt limit. On the other hand, a government shutdown tonight could lead the market to be more pessimistic on the chances of a debt default. As BofAML notes, the link between the two issues is fairly complex but the shutdown battle is just the beginning - and, as they suspect "the fight could get ugly."

As BofAML notes,

In Washington, the link is viewed differently, with the House Republican leadership seeing an immediate deal on the CR leaving more negotiating room on the debt limit, but a shutdown having an immediate negative political impact and increasing the chances of a political capitulation on the debt limit. The link between the two issues is fairly complex.

Debt ceiling – paying the bills

The shutdown battle is just the beginning. At the time of this writing, the House decided to delay any action on an initial version of the debt limit extension, with numerous extraneous provisions attached, including a one-year delay in implementing the ACA, the Keystone pipeline, energy policy, financial regulation, and others. These extra provisions could be a basis for giving the Republicans some political cover in passing a debt limit extension.

However, disagreements among House Republicans have delayed this initial vote on the debt limit for at least several days. The president continues to insist there will be no negotiations over the debt limit. The divisions among House Republicans, as well as the relative political weakness of the president, who has seen his approval ratings decline, increase the difficulty of finding a path that would lead to a solution. We expect a solution will be reached before the deadline because the political costs of a debt default would be significant.


Important dates, mechanism of debt ceiling raise

The deadline dates pertinent to the debt limit have been narrowed considerably. The Treasury released an estimate that extraordinary accounting maneuvers allowing public debt issuance at the debt limit would be exhausted by October 17, at the latest. The CBO also estimated that the cash balance would be run down sometime between October 22 and the end of the month. In our view, there are three relevant dates, using our estimates of the path of the debt outstanding subject to the limit and the Treasury cash balance.


October 15
We estimate that the Treasury exhausts its accounting maneuvers on October 15. This date is the settlement of the mid-month coupon auctions, in the 3y, 10y, and 30y maturities. Any uncertainty in the ability to settle the entire auction without breaching the debt limit would require one of three choices:

  • delaying the auctions and issuing cash management bills instead,
  • scaling down the auction sizes to only roll over maturing issues,
  • or auctioning the full amount and scaling down the regular bill sizes ahead of time to create enough headroom,

with the last alternative being the most likely in our view. According to our estimates, this date would be a fairly close call, but maneuvers are certain to be exhausted in the next day or so, with a mid-October payment into the Highway Trust Fund.

After this date, the Treasury would be in rollover mode, issuing just enough at each auction to roll over maturing debt, while paying for outlays using withholding tax revenues and steadily draining the outstanding cash balance. In our view the Treasury may have enough cash balance to make it to the end of the month and make the month-end interest payment, although there is substantial uncertainty.

November 1
Treasury will fail on its scheduled spending obligations on November 1, having almost certainly exhausted its cash balance. A total of $67bn in payments for social security, Medicare, Medicaid, military pay, and veterans programs will be due on this date. After this, the Treasury could only spend money as it comes in via tax revenues, with scheduled payments being delayed or only paid partially. It is uncertain how the Treasury will prioritize spending programs.

November 15
The first large coupon interest payment of $31bn is paid on November 15. If the debt limit is not raised by then, the Treasury is likely to fail to pay bond interest and will be in technical default.

Key Factors

There are four key factors while analyzing possible market implications of the upcoming fiscal debates, in our view.

Higher market sensitivity to fiscal discussions: Given that both Chairman Bernanke (in his September FOMC press conference) and NY Fed President Dudley referred to the upcoming discussions as a risk factor for their outlook, market sensitivity to these headlines is likely to be more than initially anticipated. Tapering expectations priced into the market may change depending on the severity of the outcome.


The fight could get ugly: As our economics team points out, by shifting the focus of the debate to the funding of the ACA (instead of specific spending cuts), the Republicans have found a less politically dangerous strategy. At the same time, President Obama perceives himself in a stronger negotiating position given that he does not face reelection this time, reducing the effect of some of his own declining approval polling numbers and other recent polls that show equal blame adhering to both sides in a shutdown.


The result is unlikely to be near-term fiscal tightening: Given the gradually improving deficits over the last few years, the discussions on the current episode are unlikely to result in near-term fiscal tightening (unlike 2011, which led to the sequester). This is evident in that most Republican proposals no longer attach near-term cuts to spending. Instead, they are focused on health care and entitlement spending.


External factors that affected us in 2011 unlikely to repeat: This episode is unlikely to be of the same scale as the debt ceiling crisis in 2011. At that time, economic data were very weak, the Fed strengthened its forward guidance and was contemplating Operation Twist, European peripheral spreads were widening dramatically, and there was novelty around the debt ceiling and possible downgrades of the US sovereign credit rating. None of these one-time factors are in play this time.

Even though there is no technical link between the two issues, there is still a link in the minds of market participants because a government shutdown next week may lead the market to be more pessimistic on the chances of a debt default.

While comparing the market reactions from 2011, we caution investors to be aware of certain key differences. There was a novelty to dealing with the ceiling in 2011. The US in recent history had not experienced such a bitter showdown on whether to pay the nation’s bills, and markets likely had greater uncertainty premiums.

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Whatta's picture

Did anyone else puke a little, or a lot, when he kept saying "the people's government"?

Gawd that man is the epitome of hypocrisy...and a total lying asshat to boot.

Money Maker's picture

I'm nervous for sure...a government shutdown means I probably made over 1,000% return in two days...


Wish me luck boys and girls!

HoofHearted's picture

COULD get ugly? Have you bitchez seen Pelosi? Barack Obama? Michelle? Politics is a soap opera for ugly people. And we've got some ugly ones in the public arena...

Money Maker's picture

I'm personaly betting on the Special Olympics teams in Washington to do the wrong thing.  Their is a good change I lose 80 to 100% of my investment if they dont shut the government down. I basicly went for the hero or zero....hope I didnt miss judge the situation.

MrButtoMcFarty's picture said "investment".

john39's picture

red team vs. blue team is an integral part of the plan to destroy the culture of the american people.   people should just walk away and refuse to ever vote for anyone affiliated with a political party.  

DeadFred's picture

I don't get why Obama's approval rating is going down, it's the Republicans' fault isn't it? Maybe the people have some strange belief that a leader should be able to lead.

Tegrat's picture

Anyone who think it's the Republicans' fault has been putting their faith in the MSM. Apparently no one knows that the dem lead Senate hasn't passed a budget  since 2009.



Whatta's picture

Asshat Obama said that the budget was a basic responsibility too...apparently his telepromter forgot that the Dems haven't passed a budget in forever.

Antifaschistische's picture

"After this, the Treasury could only spend money as it comes in via tax revenues, with scheduled payments being delayed or only paid partially. "

What so bad about this?

blindman's picture

the people's government on it's knees to the
world's fake money shit bag fraud peddlers
manipulating the world's populations into suicide
and genocide for entertainment and profit.
Rich Man's War - John Trudell

stocktivity's picture

   You just know this shit isn't going to last more than a few days. The printing will resume. Have no fear. It's all Bullshit!

Pooper Popper's picture

July 4, 1776: "... that whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government ..."

Mototard at Large's picture

Why do I keep getting that August 1914 feeling about what is going on these days?

One And Only's picture

Get to work Mrs. Chairman

surf0766's picture

The bls can fix that chart

Freedumb's picture

I hear the seasonal adjustment equation is to multiply any negative metric by -1

DeadFred's picture

That would be cheating. They square the number then take the square root.


'Don't I yearn for the days where a draw across the neck made fucking resolution!?'

vulcanraven's picture

"I may have fucked up my life flatter'n hammered shit, but I stand here before you today beholden to no human cocksucker, and holdin' a workin' fuckin' gold claim, and not the U.S. government tellin' me I'm trespassin', or the savage fuckin' red man or any of these other limber-dick cocksuckers passin' themselves off as prospectors had better try and stop me."


Elsworth, S01E01,, one of the best quotes.

Mototard at Large's picture

Just a thought, but one problem with large organizations is that they are generally capable of reacting to only one crisis at a time.  If there is a shut down, then both the political and financial systems will find themselves in a crisis mode way of thinking - at least for a few days.

If there is another crisis in that same time period - the effects of the second crisis will be greatly magnified as the systems will be ill equiped to deal with them.  Think here of a chemical attack in Syria, someone in Lebanon firing a missile into Israel, a crisis between Japan and China over the Senkaku/Diaoyutai, an HFT trading breakdown  or something similar.

This is not a predcition, just a quick note to say keep an eye out for an event that could have an overaly large impact.

blindman's picture

financialize the default with a swap through aig
and everything is fine,
then go to the woods and shit with the bears.

Kreditanstalt's picture

Extending, pretending, kick that can...!

FieldingMellish's picture

"we're not some banana republic" Correct. Banana republics can always export bananas to raise cash, but the US insists on keeping them Washington.

blindman's picture

did someone say "get" ugly?
we left ugly long ago , must be into
double bugly ugly by now.
woogly boogly, bugly ugly even.
for insights ......
we should probably consult a few crime family
survivors who have previously experienced this, first hand,
systemic decay and destruction.

Robot Traders Mom's picture

Enslaved people, begging for the government to not shutdown and debase their currency further...


A pretty fucking flawless design by the PTB. I don't think fuckwads like Kissinger could have imagined it would be this easy...

OwnSilverPlayMusic's picture

TV was great for mind control, but Kissinger couldn't have imagined that we would glady pay hundreds of dollars, and ridiculous monthly fees just for the right to carry our propaganda devices with us at all times.

Pandorable's picture

The "Totalitarian Tiptoe"...with problem--reaction--solution.

It's obvious to anyone with the intellect of a fruit fly that the illuminati cabal is getting ready to collapse the entire financial system. DHS and FEMA have the concentration "residence" camps prepared all over the US and martial law is the next false flag away. This is so much bigger than petty politics. We've been played to be in hateful conflict with each other over race, sex, politics, money and religion so we're in chaos and incapable of organizing against the military industrial complex.

Once the govt shuts gets easier to tweak fear and emotions. "False" flags to watch for: cyber or grid attack, comets, solar flares, assassinations and/or (faked) "alien" invasions...anything with "terror" attached to the label.

Once everyone is starving and shaking in their dirty boots, the NWO comes in to create order from the chaos. They'll feed you if you let them chip you. Money is the least of the cabal's concerns. Culling, my dears.


RaceToTheBottom's picture

Find Greenspam and punch him senseless

FreeBull's picture

They have no choice but to extend the debt limit...protect yourself from the eventual future outcome of all this debt and money printing with physical precious metals...

Tsar Pointless's picture

The 1% have waited a long time for this moment to come along again.

They're close to getting what they want - which is the whole piece of the pie. The 1% want 100% of everything.

No government=everything for them.

ebworthen's picture

Shhh!  You'll frighten the children!

The 1% in France had everything, until they lost their heads over it.

Whatta's picture

President zerO said in his speech this afternoon something to the effect of, and badmouthing about:

paraphrased: one faction of one party in one part of the government was holding it hostage.

Guess what President zerO? THAT'S the way it should be. Reach agreements we can all live with...YOU are the fvcking one that unilaterally shoved zerOcare down our face. Live with the consequences now.

Bryan's picture

Don't they all realize that nobody is watching any more, and nobody cares?  They have all made themselves irrelevant. 

Hey, isn't DWTS on tonight?!

JamesBond's picture

The math is not adding up here....

Somebody wants to pay an insurance company $100 a month for 'insurance' so that the insurance company can pay $25,000 to cover their pre-existing condition.  

So, where does that $24, 900 differential come from?  



Pig Circus's picture

So, where does that $24, 900 differential come from?  


Ident 7777 economy's picture


So, where does that $24, 900 differential come from?   "

From "The turnip" ... you know, the one that fell off the truck ...



Billy Shears's picture

Yes,  we need to pay our bills but by cutting our spending to free up cash to do the same. The only items on the above list that should remain untouched are SS and coupon payments everything else needs to be consolidated and slashed and/or eliminated. 

RSDallas's picture

The only thing ugly about this is the threats of what could happen if the government shuts down. They are all lies. Shut the damn thing down. None of this even matters. We, the USA, are so far in debt that we are going to implode anyway. It is unavoidable.

RSDallas's picture

The only thing ugly about this is the threats of what could happen if the government shuts down. They are all lies. Shut the damn thing down. None of this even matters. We, the USA, are so far in debt that we are going to implode anyway. It is unavoidable.

Goldbugger's picture

What about FOOD STAMPS , in three days we will have RIOTS, in `10 days martial law.

ebworthen's picture

When the rule-of-law has been abandoned, the middle-class and productive career employment gutted, and the moral and social contracts ripped to shreds - the figureheads overseeing the fall of the Republic could be anyone.

Yes, we have an equivocating Sophist community organizer as President but he is joined by a cabal of the same whether they be attorneys (the majority of CONgress - surprise), the Supine Court (duh), or the professional Mandarin's taking charge in the U.S. Military and other para-military branches (NSA, BATF, DHS, FBI, CIA, IRS, etc.).

We're fucked.  The real people are hunkering down or bailing.

The New Rome will burn.

SnatchnGrab's picture

There's no link between spending money we don't have and raising the debt ceiling to spend more money we don't have?


Cult of Criminality's picture

"COULD get ugly? Have you bitchez seen Pelosi? Barack Obama? Michelle? Politics is a soap opera for ugly people. And we've got some ugly ones in the public arena"

Do not forget the ugliest............franken Feindstein

whateverittakes's picture

Every year now it is raise the debt ceilling. The whole economy since 200* is negative growth without the deficit spending. Deficit spending creates capital gains in the market and thus capital gains revenue for the government. We are in a circle jerk of diminishing returns on this.

lolmao500's picture

November 15
The first large coupon interest payment of $31bn is paid on November 15. If the debt limit is not raised by then, the Treasury is likely to fail to pay bond interest and will be in technical default.

Or you know, they could cut the budget to have enough money left to pay that $31bn using only taxes coming in...