A Deal Reached?
Good morning and I hope you enjoyed Memorial Day. Since the late-1860s it’s been a day to remember those who died defending our great country, and sometimes while defending it from itself. Originally known as Decoration Day, the holiday honored Union soldiers who fought and died during the Civil War. It wasn’t until the early 1970s that Congress adopted Memorial Day in its place and the rest, as they say, is history. See, Congress can get stuff done when it wants to…
Fast forward to this past weekend when it was announced that Congressional leaders and the White House had actually hammered out a debt ceiling deal. That’s great news but much work remains in terms of whipping up votes needed to pass the bill. My understanding is that voting will take place this Wednesday evening so that members of Congress have time to read what they’ll be voting on. So we still have to wait a bit for final resolution to the current debt ceiling issue, but so far all this is good news.
What’s in the bill?
I’m attaching a link below to a Wall Street Journal article that does a good job of summarizing the details. To summarize further, it’s being reported as the debt ceiling deal nobody wants, but that gets the job done by kicking the can down the road until January 2025. Federal spending will be cut a bit for a time, with caps/cuts to military and non-military spending, the IRS’s proposed budget, a claw back of unspent Covid relief money, and other spending reductions. Work requirements were also extended for some federal unemployment benefits, and certain senators got the skids greased for their pet projects.
Here's the link I just mentioned.
https://www.wsj.com/articles/whats-in-the-debt-ceiling-deal-461b9822
There’s been lots of talk of specific X-dates for when the true deadline is for all this, and that date has been moving around a lot depending on the source. The most recent estimate is June 5th, but others suggest it could be later. Whenever it is, Congress should have enough time to get the deal passed and then, presumably, it would be signed promptly by the president, and we can all move on.
Here’s an interesting info-graphic from Barron’s on how a technical default might play out.
And here’s some information about the X-date taken directly from the Wall Street Journal for the sake of simplicity.
What happens on June 5?
If the so-called X-date arrives and Congress hasn’t raised the debt ceiling, the Treasury will have a series of bills it might not be able to pay.
For example, roughly $1 billion in Medicare payments and $1 billion in payments to military contractors are due on June 5, according to projections from the Bipartisan Policy Center. The government pays billions in bills every day.
Treasury has started working with federal agencies to adapt its payment systems in case it has to start delaying payments. The department hasn’t disclosed its exact plans, but one option it has discussed with other agencies would be to delay payments until the Treasury has enough cash for a full day’s bills.
Yellen had previously warned that the U.S. could run out of cash as soon as June 1. In a letter to lawmakers last week, she said the Treasury would be able to pay the roughly $130 billion due on June 1 and June 2, but she warned the department wouldn’t likely be able to make the roughly $96 billion in payments due the week of June 5.
Would the U.S. be in default?
It depends.
The Treasury won’t have to make any debt payments until June 6, when about $136 billion in securities mature, according to the BPC. Normally, the Treasury would simply roll over those debts by selling new debt. That is a routine process, but if it ran into problems and investors weren’t paid back on time, the U.S. would default on its debt.
A payment on the interest on the debt isn’t due until mid-June. Missing an interest payment would also constitute default. A slug of new tax revenue will also come into the Treasury in mid-June, when quarterly tax payments come due, easing its ability to keep paying bills.
If the U.S. stays current on its debt payments but misses other obligations, it is more complicated. Rating firms such as Fitch Ratings and Moody’s have indicated they would say the U.S. has defaulted if it misses payments on principal or interest on the debt.
Still, Fitch said it could downgrade U.S. debt because of any missed payment even if it hasn’t defaulted on debt.
Yellen has said that even if the U.S. stays current on debt payments, it would be in default if it failed to pay any bills.
“We will default on some obligation, and it’s really not an acceptable state of affairs,” she said last week.
Have questions? Ask us. We can help.
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