‘Wiggle room’ seen on Aug. 2 debt deadline

by
July 27, 2011

By Patrice Hill-The Washington Times

Global markets recently fixated on the budget fight in Washington, but have remained mostly calm, in part because many investors think the Treasury Department will be able to avoid default for at least a week or two beyond the Aug. 2 “drop dead” deadline touted by the White House.

The additional elbow room that Treasury has — though the White House insisted again Tuesday that it has no “wiggle room” — comes from a variety of sources, according to Wall Street analysts. For one, federal revenues came in stronger than expected in recent weeks, giving the Treasury an extra $14 billion in cash to spend on Social Security and other payments after Aug. 2, one analysis found.

Also, the Treasury can rejuggle its scheduled bond and bill auctions to buy additional time as it has during past debt-limit fights, and the Federal Reserve could come to the Treasury’s rescue, freeing up additional borrowing room and buying additional time through back-room maneuvers, the analysts say.

“There’s lots of discussion in the financial markets that Treasury has enough cash flow and the Fed can sell bonds to extend the deadline to mid-August,” said John Silvia, chief economist at Wells Fargo Securities.

The market’s lack of concern about an imminent default was on exhibit Tuesday, when investors showed a strong appetite for $35 billion in two-year notes sold by Treasury. The price for the securities actually rose rather than declined, as would be expected if investors were bracing for a default next week.

Analysts say the Treasury has enough cash on hand to get by for another week beyond Aug. 2, even without resorting to extraordinary maneuvers.

“We now believe that August 10 is a more realistic deadline for the Treasury to run out of cash,” based on stronger than expected receipts in July, said Anshul Pradhan, analyst at Barclays Capital.

According to Barclays’ analysis, the Treasury will have enough cash on hand to make $22 billion of Social Security payments on Aug. 3, as well as pay other bills until another round of Social Security payments comes due on Aug. 10. It estimates that Treasury is most likely to run out of cash on or around the second Social Security payment date, and would be in danger of defaulting on debt-interest payments coming due on Aug. 15 without an increase in borrowing authority.

To read more, visit: http://www.washingtontimes.com/news/2011/jul/26/wiggle-room-seen-on-aug-2-debt-deadline/

 

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