Debt Limit Analysis Sept 2013 Market Risk

7/29/2019 Debt Limit Analysis Sept 2013 Market Risk

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Market Risk


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ONE-YEAR COST OF 2011 DEBT LIMIT EVENT 29

The Government Accountability Office (GAO) issued a reportdetailing additional costs to taxpayers as a result of thedelayed 2011 debt limit increase.

A substantial cost to taxpayers stemmed from elevatedinterest rates on U.S. securities issued in 2011 prior to whenthe debt limit was increased in August.

GAO conducted an economic analysis to estimate the resultingchange in interest rates.

For Fiscal Year 2011, GAO estimated additional interest costs

to taxpayers of $1.3 billion.


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TEN-YEAR COST OF 2011 DEBT LIMIT EVENT 30

The cost of the event to the federal government, however,continues to accrue because many of the bonds issued duringthat period remain outstanding.

BPC extended GAOs methodology to analyze the long-termcost to taxpayers stemming from the elevated interest rates.

Estimate of the ten-year cost to taxpayers of the 2011 debtlimit standoff = $18.9 billion


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PRIORITIZATION: MARKET RISK 31

Treasury must roll over well over $370 b in debt that willmature this year during the Oct 18Nov 15 period.

When a Treasury security matures, Treasury must pay back theprincipal plus interest due. Under normal circumstances, Treasurywould simply roll over the security.

As one security matures, the principal and interest for that securitywould be paid for with cash from the issuance of a new security.


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PRIORITIZATION: MARKET RISK 32

In a post-X Date environment, this operation may not run as

smoothly.

Two elements of market risk:

Treasury will have to pay higher interest rates to attract newbuyers.

It is possible, if unlikely, that not enough bidders would appear,forcing Treasury to either use cash on hand to pay off securitiesthat came due or, in a worst-case scenario default on the debt.

The 2012 Office of Inspector Generals report found that therewas substantial concern about this issue among Treasuryofficials during the 2011 debt limit event.


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DEBT ROLLOVER AND THE X DATE

Debt Maturing Between

October 18 and November 15

Note: Does not include estimates of 4-week maturities that have yet to be auctioned. Numbers do not add due to

rounding.

Date Amount

October 24 $58 billion

October 31 $115 billion

November 7 $54 billion

November 14 $79 billion

November 15 $63 billionTotal $370 billion

Source: TreasuryDirect

33


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THE RISKS ARE REAL 34

Additional borrowing costs for the federal government fromdelay in increasing the debt limit.

Additional rating agency downgrades are possible.

Fitch: Arrears on [various federal government] obligations would notconstitute a default event from a sovereign rating perspective but very

likely prompt a downgrade even as debt obligations continued to bemet.

Translation: If we go past the X Date without a debt limit increase,prepare for another downgrade.

S&P downgraded in 2011 and reaction was not severe.

But there is uncertainty about effects of another downgrade sincemany funds are prohibited from holding non-AAA securities.


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THE RISKS ARE REAL 35

Market risks beyond the X Date:

Treasury market, interest rates

Potential for serious equity market reaction (401(k)s, IRAs,other pensions)

Our economy

The global financial system

No guarantee of the outcome; risks are risks


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ESTABLISHING A NEW DEBT LIMIT LEVEL 36

Roughly what would the debt limit need to be to get through 2014*?

*The estimates in the chart above assume that sequestration continues to take effect, war spending declines as scheduled, Medicare

physician payments are frozen at 2013 levels (the Doc Fix), and the tax extenders in the American Taxpayer Relief Act of2012 are

extended permanently. Given that the time frame is far in the future, this estimate is subject to significant uncertainty.

Source: Congressional Budget Office, Bipartisan Policy Center projections

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

Current Debt Limit Debt Limit to Cover Obligationsthrough December 2014

Billion

sofDollars

$16.7

Trillion

$17.8

Trillion

Increase of~$1.1 trillion


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Methodology &

Assumptions


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BPC METHODOLOGY 38

Reviewed financial data from the Treasury Department Daily + Monthly Treasury Statements

Monthly Statement of the Public Debt

Government Account Statements

Projected daily operating cash flow and change in

intragovernmental debt using: Historical financial data

CBO analysis of spending growth

Adjustments for anticipated issues (e.g., GSE dividends, extraordinarymeasures that become available on certain dates)

Assumption: FY14 budget is funded at sequestration levels


12/12

Authors

STEVE BELL SENIOR DIRECTOR OF THE ECONOMIC POLICY PROJECT

SHAI AKABAS SENIOR POLICY ANALYST

BRIAN COLLINS POLICY ANALYST

ASHTON KUNKLE PROJECT ASSISTANT

MEDIA CONTACT:

ASHLEY BERRANG

DIRECTOR OF COMMUNICATIONS(202) 637-1456

Documents

Debt Limit Analysis Sept 2013 Market Risk