WASHINGTON — Last week’s vote by House Republicans to lift the nation’s debt limit in exchange for significant spending cuts could result in a protracted battle over raising or suspending the borrowing limit to avoid a U.S. debt default. It was the first step in high things.
But as Republicans and President Biden and his fellow Democrats prepare for battle, there is a key issue that is beginning to sow anxiety in Washington and Wall Street.
As the U.S. narrowly hit its $31.4 trillion debt ceiling in January, the Treasury Department announced a plan to allow the government to continue paying its bills, including payments to bondholders who own government debt. was forced to adopt an accounting operation known as special measures for Treasury Secretary Janet L. Yellen said at the time that her power to delay defaults (if the U.S. doesn’t make payments on time) could be exhausted by early June. However, she cautioned that the estimates are subject to considerable uncertainty.
With June just weeks away, there remains uncertainty about when US cash will run dry, known as the X-Date.
The key to X-date is the tax receipt.
Determining the X-date depends on a complex set of factors, but ultimately the most important is how much the government spends and how much it receives through taxes and other revenues.
The Bipartisan Policy Center, which tracks federal revenues, predicted in February that Congress would need to raise or suspend debt limits over the summer and early fall to avoid a default. The specific date will largely depend on how quickly tax revenues enter government coffers.
There are signs that tax revenues for 2022 are too late to be complacent. An economist at Wells Fargo wrote in a note to clients last week that he could see an X-date as early as early June as tax collections appear weaker than expected. However, they continue to believe that early August is the most likely deadline for default.
“A U.S. debt default is unlikely, but insignificant, is still very much a concern, and we think the last thing Treasury officials want is an X-date stalking Congress. there are,” they wrote.
Taxday payment is still coming. Goldman Sachs economists predicted last week that there could be about $60 billion in cash left in the Treasury by the second week of June, allowing the government to keep paying him through late July. was doing.
Natural disasters can foster debt disasters.
There are surprising factors that cause the X-date to arrive early. It’s the weather. The Internal Revenue Service extended his April 18 filing deadline to October in many counties because of severe storms, flooding, and landslides in California, Alabama, and Georgia this year.
The IRS said this year that storms could cause delays in filing returns for individuals and businesses in affected areas. They were also given time to make contributions to retirement and health savings accounts.
Farmers who often file their tax returns by March 1 were also given a grace period until October 16, allowing them to defer payments normally due in January to that date.
It’s not clear how much tax revenue has been delayed by the storm, but the extension has left the Treasury Department with less room to continue paying bills.
An update may come this week.
The Treasury Department plans to send a letter to Congress in the coming days with a more accurate estimate of when cash will begin to run low. We may also take new steps to avoid default. Earlier this year, Yellen announced that he would retire some of his existing investments and suspend new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retirement Health Benefit Fund.
Yellen warned in a speech last week that defaulting on debt would have serious economic consequences.
“Households are going to pay more for mortgages, auto loans, and credit card payments,” Yellen said during a speech at the Sacramento Metropolitan Chamber of Commerce. “And American businesses will face a worsening credit market.”
“Besides, it is unlikely that the federal government will be able to pay the millions of Americans, including military families and seniors who depend on Social Security.”
Here’s what the X-date means in negotiations:
As the X-date approaches, it will put pressure on lawmakers to act.
Analysts at Beacon Policy Advisors predict that Congress will likely pass a short-term suspension of the debt ceiling through October if a default could actually occur as early as June. If the X-date is expected to reach July, lawmakers may need to introduce the bill by early May to allow enough time to address procedural roadblocks in Congress. I can’t.
While the market is generally calm about the likelihood of default, there are some signs that investors are getting nervous.
They sold Treasury bonds maturing in three months and bought up bonds with just a month to pay off, around the time policymakers said the U.S. cash could be short.
The cost of insuring existing bond holdings against a possible US default has also risen sharply. Still, analysts say the market reaction needs to be more pronounced to force a quick trade.
“While this caused heartburn among policymakers, it was not enough to move the bargaining needle in any meaningful way,” Beacon analysts wrote. “We need a greater market reaction and a clearer X-date to fully advance the negotiations.”
But that hasn’t happened yet. Biden has indicated he is open to talking with House Speaker Kevin McCarthy about how to put the country’s fiscal situation on a better track, but the two are still scheduled to meet after the House passed last week. do not have.
