“Moody’s offers different view on debt limit”
From the WaPo, the very paper Sargent writes for:
One of the nation’s top credit-rating agencies says that the U.S. Treasury Department is likely to continue paying interest on the government’s debt even if Congress fails to lift the limit on borrowing next week, preserving the nation’s sterling AAA credit rating.
In a memo being circulated on Capitol Hill Wednesday, Moody’s Investors Service offers “answers to frequently asked questions” about the government shutdown, now in its second week, and the federal debt limit. President Obama has said that, unless Congress acts to raise the $16.7 trillion limit by next Thursday, the nation will be at risk of default.
Not so, Moody’s says in the memo dated Oct. 7.
” We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact,” the memo says. “The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit (actually the exhaustion of the Treasury’s extraordinary measures to raise funds) and a default.
The memo offers a starkly different view of the consequences of congressional inaction on the debt limit than is held by the White House, many policymakers and other financial analysts. During a press conference at the White House Tuesday, Obama said missing the Oct. 17 deadline would invite “economic chaos.”
Treasury Department officials did not immediately respond to requests for comment.
One would hope they could not be reached because they were working on a plan to prioritize spending. But the more likely scenario is that this administration is busy devising ways to harm the American people and lay the blame at the feet of the GOP — particulary the TEA Party. And why woudn’t it? They’ve found that as badly as they want the TEA Party gone, the GOP establishment hates these citizen interlopers even worse.
Last evening, David Freddoso pointed to an article at Zero Hedge that argued that maturing debt would, in a short while, push expenditures over revenue — making the case that default is possible:
With everyone’s attention turning to the debt ceiling X-Date of October 17 (or sooner now that the Pentagon is once again spending money like a drunken sailor following the recall of 400,000 workers or half of the total number fuloughed), some are wondering why is the stock market not reacting more violently. The generic response that has formed is that despite all the feamongering by Obama and the Treasury, even crossing the X-Date will hardly result in the apocalyptic outcome that so many predict as the Treasury can “prioritze payments”, i.e., paying some bills and not others, which as we explained before, means paying down debt obligations first, and everything else – whose non-payment does not constitute an event of default under US debt – last. In other words, if the US were to merely live within its means, it should have no problem remaining current on its interest expense even if that means slashing most other government programs.
While superficially this is correct, there is one issue that few are discussing, namely the mountain of short-term debt maturities between October 24 and November 15, which if unable to be rolled over – something that would hardly be able to happen in a time of quasi-technical default – would imply redemption and maturity of the debt without a subsequent rolling over.
Two elements of market risk:
- Treasury will have to pay higher interest rates to attract new buyers.
- It is possible, if unlikely, that not enough bidders would appear, forcing Treasury to either use cash on hand to pay off securities that came due or, in a worst-case scenario default on the debt.
Actually, it is very much likely that if there is fear that one or more short-term funding acutions will not result in a prompt repayment, it is virtually assured that the Treasury will simply halt new Bill issuance to avoid the panic that would result from ultra-short term rates soaring and destroying the Fed’s carefully crafted ZIRP (on the short-end) policy.
And according to our and the BPC’s preliminary calculations, just focusing on simply paying down this debt in the all too likely case that the rollover machinery grinds to a halt, means that the Treasury would be about $180 billion short of paying down just the amounts due in the table above!
So sadly, no. Those who are trying to talk down the severity of even a quasi-technical default, in an attempt to explain why the algos are oblivious to what may happen in ten short days, they have it all wrong. Instead the only logic for the lack of a selloff, is that once again, everyone and the kitchen sink, is 100% certain that should a worst case scenario transpire, it will be the “Mr. Chairman” who once again “gets to work,” and makes sure that nobody suffers any loss. After all, the New Normal is all about return; nothing about risk.
But what Freddoso doesn’t note is that the commenters, with a few exceptions, disagreed. And, excluding those who David suggested were “rooting for default”, we can see in their objections the answer to arguments made in the post proper, namely, that “default won’t happen”:
It’s called “refinancing”, happens all the time. Just raise the ceiling high enough to refinance the debt and dare Obozo to use it on anything else.
Running out of room to under the debt ceiling doesn’t by itself create a default. Maturing debt will get rolled over to new debt. (Sure, at a higher rate) It’s a wash in the debt ceiling calculation. It’s the need for new debt to meet current cash requirements that’s the problem.
– Which comment was met with even more clarification:
[...] you miss the real reason why the Dumbcrats won’t actually pull that trigger. It’s because that $20B or 5% of outlays comes from the non-defense budget which represents about 75% of the total budget. But more importantly for Dumbcrats, that non-defense portion of the budget supports about 100% of the Dumbcrat base. So the real solution will be for the Treasury to prioritize the debt payments first, then cut everything near and dear to the Repugs… starting with the Military. The problem with that solution, is that the the Dumbcrats agreed to fund the military before the shutdown. So Dumbcrat supporting Repug senators like Linda Grahm and Juan McCain, will balk at any attempt to cut the military now. So then the Dumbcrats will try to cut other pet funds to other Repub RINO senators, and they lose them. You see the Dumbcrats need the RINO Repugs in the Senate to try to make the Senate look reasonable and bipartisan in opposition to the “Wacko Tea Pary House”. But Dumbcrats agreeing to ANY negotiations means either losing money that goes to their base, or alienating GOP RINOS in the Senate that they need to look “reasonable and bi-partisan. That’s why the Dumbcrats have taken the “My way or the Highway” road and NOTHING will move them from it. They have trapped themselves on this road to nowhere and only the Repubs caving 100% can get them off of it.
The Democrats know this. And the GOP establishment is desperate to help them find a way out, to keep the status quo alive in DC.
The truth is, Obama and Reid are in checkmate. Any GOP surrender should be seen for what it truly is: a conscious effort to extricate the Democrats from their mistakes and maintain the higher revenue flow that both entrenched parties — the single party ruling elite — enjoy.
Using default — as both Boehner and Obama (and a number of “conservative” journalists have done) — to make the case for surrender is the work either of the ignorant or the neo-statists who make up so much of the GOP party’s ruling oligarchy.