While official Washington is focused on potential tax hikes and automatic spending cuts, another fiscal crisis looms on the horizon. A report released Tuesday warned that the federal government is likely to hit a ceiling on issuing new debt come late December and could begin defaulting on obligations by mid-February.
The report from the influential Bipartisan Policy Center, a policy think tank, also highlighted why there’s less room for the Treasury Department to maneuver than during last year’s debt-ceiling debacle. The center warned that financial markets may see greater turmoil than in 2011.
The government should hit its $16.394 trillion debt limit during the final week of December, according to the center. The Treasury Department can, as it did in 2011, turn to a number of extraordinary measures to avoid defaulting on the debt it has already issued. The juggling act by Treasury is likely to run out, however, somewhere around mid-February.
That raises the prospects of a debt default by the world’s largest and most developed economy, unheard of in modern times. Congress and the Obama administration last year dragged out negotiations to raise the debt ceiling – something previously done year after year without great controversy – over a period of roughly eight months. There won’t be that luxury this time.
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“The extraordinary measures this year will yield less money to Treasury to use than they did in 2011. That money will get you less time,” said Steve Bell, director of economic policy for the Bipartisan Policy Center.
In last year’s debt debacle, which resulted in an embarrassing downgrade of the U.S. debt rating by Standard & Poor’s, the crunch time came after April, when millions of Americans paid what they owed in income taxes.
This time, the government is poised to run out of temporary fixes in February. That date, which the center calls the X Date, falls in a month when the U.S. government is supposed to provide tax refunds to millions of Americans who’d have already filed their tax returns for 2012. The center thinks that month alone, there’ll be an outflow of $112 billion to taxpayers, along with another $117 billion owed to Social Security recipients and for reimbursement owed in the Medicare and Medicaid systems.
On top of that, there’s $33 billion due on interest on the debt alone, and another $27 billion due to vendors who sell to the Defense Department. In all, the center sees monthly outflows owed at around $464 billion in February, compared to incomes revenue to the government of about $202 billion.
The Treasury Department declined to comment on the report. Spokesman Matthew Anderson pointed to an Oct. 31 estimate from the agency, which mirrored the center’s concerns without offering numbers. Treasury warned that the debt limit could “be reached near the end of 2012” and that extraordinary measures would allow the government to pay its debts “until early 2013.”
There are just four to six weeks of juggling available to the Treasury Department, vs. the roughly 11 weeks the agency had last year.
“Congress has a shorter amount of time to deal with this problem than it might expect,” said Shai Akabas, a senior policy analyst at the center and co-author of the report.
At year’s end, Bush-era income tax cuts are set to expire, as are a host of other tax measures such as extended unemployment insurance benefits and a temporary payroll tax holiday. And absent a budget deal, deep across-the-board spending cuts are scheduled to take effect early next year. Congressional leaders and President Barack Obama have said they’re working on a two-step solution that addresses some of these matters in December with a mechanism to resolve the rest next year.
It leaves little room for attention to the coming debt-ceiling issue.
Last year, the debt ceiling talks hurt hiring and economic growth, erasing wealth from businesses and ordinary Americans alike. The Government Accountability Office estimated that the debt-ceiling standoff cost taxpayers $1.3 billion. The center puts the costs at $19 billion over 10 years, based on changes in the cost of borrowing during the standoff period and what the changes amount to over the maturity of that debt.
Ratings agencies Moody’s Investors Service and Fitch Ratings have threatened to join S&P in downgrading U.S. debt absent resolution of the debt ceiling. If all three take away the vaunted AAA rating of government bonds, many large pension funds and endowments may be required to shed them. It’d leave them only AAA-rated government bonds issued by smaller countries such as Switzerland and Norway.
“These markets aren’t nearly as deep and as liquid as our market. Our sovereign debt market just overwhelms all the other debt markets put together,” said Bell.