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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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Mon, 09/30/2013 - 20:13 | 4007692 I am more equal...
I am more equal than others's picture

Fuck Obama

Mon, 09/30/2013 - 20:27 | 4007742 Whatta
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.

Mon, 09/30/2013 - 20:39 | 4007769 Money Maker
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!

Mon, 09/30/2013 - 20:48 | 4007792 HoofHearted
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...

Mon, 09/30/2013 - 20:54 | 4007814 Money Maker
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.

Mon, 09/30/2013 - 23:23 | 4008286 MrButtoMcFarty
MrButtoMcFarty's picture

Heh....you said "investment".

Mon, 09/30/2013 - 21:57 | 4008031 john39
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.  

Mon, 09/30/2013 - 20:42 | 4007783 DeadFred
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.

Mon, 09/30/2013 - 20:48 | 4007799 Tegrat
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.

 

 

Mon, 09/30/2013 - 21:01 | 4007841 Whatta
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.

Mon, 09/30/2013 - 21:24 | 4007913 Antifaschistische
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?

Mon, 09/30/2013 - 20:52 | 4007810 blindman
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
http://www.youtube.com/watch?v=fDOZ00A1aos

Mon, 09/30/2013 - 20:29 | 4007749 stocktivity
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!

Mon, 09/30/2013 - 20:36 | 4007763 Pooper Popper
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 ..."

Mon, 09/30/2013 - 20:13 | 4007693 Mototard at Large
Mototard at Large's picture

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

Mon, 09/30/2013 - 20:17 | 4007701 One And Only
One And Only's picture

Get to work Mrs. Chairman

Mon, 09/30/2013 - 20:17 | 4007702 surf0766
surf0766's picture

The bls can fix that chart

Mon, 09/30/2013 - 20:36 | 4007768 Freedumb
Freedumb's picture

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

Mon, 09/30/2013 - 20:47 | 4007791 DeadFred
DeadFred's picture

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

Mon, 09/30/2013 - 20:17 | 4007705 AL_SWEARENGEN
AL_SWEARENGEN's picture

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

Mon, 09/30/2013 - 20:47 | 4007787 vulcanraven
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."

Mon, 09/30/2013 - 20:55 | 4007818 AL_SWEARENGEN
AL_SWEARENGEN's picture

Elsworth, S01E01,, one of the best quotes.

Mon, 09/30/2013 - 20:23 | 4007710 Mototard at Large
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.

Mon, 09/30/2013 - 20:18 | 4007711 blindman
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.

Mon, 09/30/2013 - 20:21 | 4007721 Kreditanstalt
Kreditanstalt's picture

Extending, pretending, kick that can...!

Mon, 09/30/2013 - 20:23 | 4007724 FieldingMellish
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.

Mon, 09/30/2013 - 20:27 | 4007734 blindman
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.

Mon, 09/30/2013 - 20:27 | 4007735 Robot Traders Mom
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...

Mon, 09/30/2013 - 21:02 | 4007772 OwnSilverPlayMusic
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.

Mon, 09/30/2013 - 21:21 | 4007909 Pandorable
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 down...it 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.

 

Mon, 09/30/2013 - 20:27 | 4007737 RaceToTheBottom
RaceToTheBottom's picture

Find Greenspam and punch him senseless

Mon, 09/30/2013 - 20:26 | 4007738 FreeBull
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...http://goo.gl/8hDSr5

Mon, 09/30/2013 - 20:26 | 4007739 Tsar Pointless
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.

Mon, 09/30/2013 - 20:53 | 4007815 ebworthen
ebworthen's picture

Shhh!  You'll frighten the children!

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

Mon, 09/30/2013 - 20:31 | 4007752 Whatta
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.

Mon, 09/30/2013 - 20:34 | 4007757 Bryan
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?!

Mon, 09/30/2013 - 20:34 | 4007761 JamesBond
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?  

 

jb

Mon, 09/30/2013 - 20:48 | 4007794 Pig Circus
Pig Circus's picture

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

You

Mon, 09/30/2013 - 20:54 | 4007819 JamesBond
JamesBond's picture

Fuck you Obama

Mon, 09/30/2013 - 21:04 | 4007848 Ident 7777 economy
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 ...

 

 

Mon, 09/30/2013 - 20:40 | 4007776 Billy Shears
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. 

Mon, 09/30/2013 - 20:42 | 4007778 RSDallas
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.

Mon, 09/30/2013 - 20:41 | 4007779 RSDallas
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.

Mon, 09/30/2013 - 20:45 | 4007785 Goldbugger
Goldbugger's picture

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

Mon, 09/30/2013 - 20:55 | 4007803 ebworthen
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.

Mon, 09/30/2013 - 20:56 | 4007824 SnatchnGrab
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?

/facepalm

Mon, 09/30/2013 - 21:27 | 4007922 Cult of Criminality
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

Mon, 09/30/2013 - 21:36 | 4007954 whateverittakes
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.

Mon, 09/30/2013 - 22:01 | 4008045 lolmao500
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...

Mon, 09/30/2013 - 23:11 | 4008239 andrewp111
andrewp111's picture

The debt ceiling is not what it is cracked up to be. If the ceiling is not raised, Obama has 3 options (1) Stretch payment dates for salary and benefits (but not debt payments) to use only cash on hand. This has financial risks because it is a soft default. (2) Ignore the debt ceiling and continue as normal. This has legal risks - particularly for bondholders who buy their bonds after the deadline. A court could rule their bonds to be null and void. Ouch!! Message - don't buy any long term US debt if Obama does this. Keep things very short term and watch the courts closely. (3) Mint Trillion Dollar Proof Platinum Coins.  This has no legal risks as the clear language of the statute allows it, but it does have huge and unquantifiable financial risks. Also, once done, the precedent is set and can never be undone. Every trader will know forevermore that the USG will mint money to get itself out of a difficult situation, and they will value the dollar accordingly. This is the financial equivalent of Caesar crossing the Rubicon, and cannot be done lightly.  I suspect, given Obama's record to date, that he would rather do option (1) or (2) than take a chance with (3). Ultimately, he may have no choice if the GOP holds firm, though. With Obamacare, Obama is permanently changing the country, and he may have no choice but to fund government deficits by direct seigniorage as well as the price to pay for that change.

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