Why Is The US Treasury Suddenly Concerned About "Loss Of Market Access"
Earlier we revealed that one of the key topics of discussion during yesterday's quarterly meeting of the TBAC committee with government workers (including Under Secretary for Domestic Finance Mary Miller, Assistant Secretary for Financial Markets Matthew S. Rutherford, Deputy Assistant Secretary for Federal Finance James G. Clark, and Director of the Office of Debt Management Fred Pietrangeli, and two NY Fed staffers, Nathaniel Wuerffel and Lorie Logan) was whether or not markets had become far too complacent, there was another, even more important topic of discussion than simply the beaten dead horse which is the fate of manipulated stock markets. The topic: the US Treasury suddenly losing access to capital markets.
This is how the Treasury framed the discussion:
Pursuant to the Committee’s request at the April meeting that Treasury present a cash balance management framework that mitigates certain risks, DAS Clark began his presentation by reviewing Treasury’s current cash balance objectives. He explained that Treasury’s main sources of cash are susceptible to risk, noting that Treasury has historically focused on risks associated with errors in fiscal forecasting. Clark stated that several events had made it clear that market access and settlement risks could also potentially impair Treasury’s ability to fund government expenditures for several business days.
A detailed discussion ensued amongst Committee members around the benefits and potential concerns related to holding a higher cash balance in order to mitigate the consequence of losing market access. The Committee concluded that it would be cost effective and prudent for Treasury to hold a higher cash balance. They suggested that Treasury should continue to analyze the details of maintaining a higher cash balance and present its findings at an upcoming TBAC meeting.
In other words back in April, the US Treasury for reasons unknown, tasked the TBAC to consider levels of cash funding needs for the US treasury as a result of "certain risks."
Specifically as a result of "several events" among them the December 2, 2013 delay of a 4 week bill auction due to IT issues, Super Storm Sandy in October 2012, and September 11, 2001, the Treasury has suddenly - five years into the recovery - gotten concerned that its ability to fund government expenditures for "several business days" could be "impaired."
As examples of market disruption, the Treasury mentions two: Hurricane Sandy: 1.5 days and September 11th: 2-3 days.
The TBAC then responds that the "Cash required to cover the worst 1-5 days since FY2009 is relatively constant at approximately $331 billion."
Here is what the TBAC finds: "Historically, Treasury has only had enough cash to withstand a loss of market access for approximately 2 days."
- Treasury would have been protected against losing market access for 1 day roughly 80 percent of the time.
- Treasury would have been protected against losing market access for 5 days less than 10 percent of the time.
But it is the TBAC's punchline that is most important:
If Treasury lost market access for a short period of time, the U.S. government would face a substantial cash shortfall.
- Since the beginning of the financial crisis, on average, Treasury would have faced an $28 billion cash shortfall if market access had been lost for 3 days.
- This shortfall increases to $89 billion if market access had been lost for 5 days and $239 billion if market access had been lost for 10 days.
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Summarizing the story so far: after years of never even once contemplating how much cash the US Treasury has on eht books, suddenly, 5 years into the "recovery" the Treasury is suddenly very concerned about the level of statutory cash. Why? Fears over loss of "market access" such as those during a "glitchy" 4 week bill auction in December 2003 (implication: malicious hackers) or September 11 (implication: domestic terrorism accident).
And what is probably most disturbing is the TBAC's ultimate answer to the TSY's question whether it should hold more cash:
The Committee concluded that it would be cost effective and prudent for Treasury to hold a higher cash balance.
Just in case, surely. Still, one wonders, do they know something we don't, and just what was unreported during the "framework discussion" phase, and just how long until the Treasury tests out its increased cash retention strategy, and most importantly: just what upcoming event could to the Treasury "losing market access"?
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Full TBAC presentation (pdf)
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