Is default deadline truly August 2? Analysts say no

WASHINGTON Wed Jul 27, 2011 11:33am EDT

Senate Majority Leader Harry Reid speaks to the press following more U.S. debt reduction talks on Capitol Hill, July 26, 2011. REUTERS/Jason Reed

Senate Majority Leader Harry Reid speaks to the press following more U.S. debt reduction talks on Capitol Hill, July 26, 2011.

Credit: Reuters/Jason Reed

WASHINGTON (Reuters) - Will the sky fall on August 2 if Congress fails to raise the debt ceiling?

Not likely, according to analysts, who say that even without the ability to borrow more money, the government could avoid a devastating default for another week or so. That raises the question of how urgently action is needed to increase the nation's borrowing limit.

For weeks, President Barack Obama and Treasury Secretary Timothy Geithner have stressed that the U.S. Treasury will run out of room to borrow funds next Tuesday and have warned of dire consequences if Congress does not raise the nation's $14.3 trillion debt ceiling in time.

But Treasury officials have never said when the government will run out of cash to pay the nation's bills, and the consensus among Wall Street analysts is that the cash won't run out until about two weeks after the August debt-ceiling drop-dead date.

"The first risk of a legitimate default is August 15," said Ward McCarthy, chief financial economist and managing director at Jefferies & Co. "Cash is not going to be an immediate problem. The debt ceiling space is not going to be an immediate problem."

McCarthy and other Wall Street analysts predict that the Treasury will have enough cash to meet its early-to-mid August obligations, including $23 billion in Social Security payments to the elderly and disabled on August 3.

That view lends credence to claims that some Republicans have been making for days now that the U.S. government will be able to keep functioning and paying its bills even if there is no deal by August 2.

But it does not take into account how the market and investors will react if Congress fails to raise the debt cap by the deadline and the U.S. Treasury is unable to tap markets for funds.

Analysts also expect that the U.S. Treasury will be able to roll over the $90 billion in U.S. debt that matures August 4.

"In all forecasts, it appears as if they have ample cash to cover their obligations," said Lou Crandall, chief economist with research firm Wrightson ICAP.

Wrightson and Jefferies expect the United States would start defaulting on its obligations on August 15, the date the government must pay out $41 billion, including around $30 billion in interest on U.S. debt.

Barclays Capital has said Treasury may run out of cash to pay its bills around August 10, when $8.5 billion in Social Security payments are due.

A Treasury spokesperson on Tuesday had no comment.


Analysts do not expect the credit rating agencies to downgrade U.S. debt if Congress does not raise the limit by August 2 and the government is still able to pay its bills.

That could potentially give a divided Congress more time to craft a plan to cut spending and raise the limit on how much Treasury can borrow.

"We think there is enough money in the month of August to take care of things," said Representative Jim Jordan, the chairman of the House Republican Study Committee, a group of more than 150 conservative and Tea Party-aligned lawmakers.

Senate Democratic leader Harry Reid and Republican House Speaker John Boehner are locked in a bitter battle over how to control spending and increase the debt cap.

Reid and fellow Democrats have proposed a one-step plan to cut the deficit by $2.7 trillion and raise the cap by the same amount to carry the administration through the November 2012 elections. Meanwhile, Boehner has pushed for a two-stage deficit reduction plan that would provide an initial increase in the debt limit that would only last a few months.

Any sign from the administration that Congress has more time to negotiate a budget deal could undermine Geithner's credibility.

The U.S. Treasury has shifted the forecast of when it would initially bump up against the borrowing cap three times and once pushed back its drop-dead estimate -- now August 2 -- of when it would exhaust all special measures that let it keep borrowing.

"It doesn't help that they have shifted dates. There is definitely a perception from lawmakers that even if they pass the deadline, they may be OK," said Tom Simons, a money market economist with Jefferies & Co. "There will come a point where it is no longer true."

(Reporting by Rachelle Younglai; Editing by Leslie Adler)

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Comments (13)
limaxray wrote:
And Obama can halt all foreign military operations and non-essential government functions to meet our obligations and avoid default even longer. In the end, a default will be the administration’s decision – a decision he may be forced to make by the GOP that will do him significant harm in 2012 regardless of what he decides. In other words, this is a lose-lose situation for Obama and the GOP knows it.

Jul 27, 2011 5:54am EDT  --  Report as abuse
John2244 wrote:
Hilarious that adults are arguing about the date. The point isnt if the deadline is exact. In business you setup targets and yes sometimes they move. If the move from a production or distribution reason thats OK. If they move because of a planning or design fault then it shows trouble.

As an an analyst, the problem isnt a few extra days or the debt ceiling; the problem is a lack of compromise. Its evident that whatever happens the likely election scenarios are for the HoR, Senate, and Executive are R/R/R or R/R/D. A less likely scenario is R/D/D.

This exercise demonstrates that the elections will move the party to the right and taxes will not be raised. In addition, the amount of spending that is being forecast to cut will impact the tax intake even more. The deficit in a purely republican plan will grow.

As an analyst, we dont make our decisions about what politicians or the public say – we do it buy what our hired economists (very boring partisan doctorates) and all are saying that the credit rating is destined to be lowered because the cards are now on the table and predicting the future is much easier. Consensus – second recession, dollar deflation and downgrade.

Jul 27, 2011 8:47am EDT  --  Report as abuse
derdutchman wrote:
limaxray, not sure the Congressional responsibility for raising the debt ceiling can be so easily shifted to the “administration” by the mere rhetoric of wishing it were so. It will probably take an actual change in the law to make that happen. I do agree, however, that, of the two parties involved, it is more likely that Obama will pay the price that statesmanship demands. With him, saving the country will be more important than saving face. The Republicans, meanwhile, will add another 1% or 2% to the 85% of this country’s wealth their friends already own.

Jul 27, 2011 9:18am EDT  --  Report as abuse
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