BUDGET BULLETIN: Fall Debt-Limit Debate

WASHINGTON, DC – The Senate Budget Committee today released its September 15, 2015, issue of the Budget Bulletin focused on the debt-limit debate. The Budget Bulletin provides regular expert articles by Senate Budget Committee analysts on the issues before Congress relating to the budget, deficits, debt, and the economy.

Read the full Senate Budget Bulletin here.

Excerpts follow:

The Fall Debt-Limit Debate

There is a growing consensus that sometime between November 15 and December 15 of this year, extraordinary measures will become insufficient to maintain payments, requiring government action. Reaching late fall, of course, depends on the likely scenario that no large, unexpected bills come due and no sudden drop in the flow of revenues occurs in the meantime.

New research from academics and the Government Accountability Office strongly indicates that the movement toward expiration is accompanied by an increase in the government’s cost of issuing new debt. It works this way: Securities brokers and money-market managers constantly create financial products that include relatively risk-free Treasury bills, notes, and bonds. These Treasury products serve as collateral or hedges in transactions that require an asset whose value is little affected by risk. For financial products that mature in or near the time when the federal government might not be able to pay all its bills, the Treasury asset no longer appears risk-free. Because it no longer has a more-or-less-certain value, brokers search for something else to anchor their products. As a result, the demand for Treasury products falls, and the yield that Treasury must guarantee buyers rises. This dynamic increases the costs to the Treasury, thus aggravating the nation’s fiscal condition. 

These costs stem solely from the mere threat of default, but there are additional potential costs to be considered from an actual failure of the Treasury to service its debt or to pay its bills. The only Treasury default of the past 100 years, a technical default from late April through early May of 1979, demonstrates the risks involved. Word processing equipment at Treasury failed in mid-April of that year, which prevented the payment of interest on Treasury securities maturing at the end of the month. This purely technical default led to a 60-basis-point increase in Treasury interest rates, which lasted for nearly a year after the resumption of interest payments.

It is nevertheless reassuring that Treasury has so many debt-limit tools at its disposal and so much experience using them. As a result, U.S. citizens and foreign observers can be reasonably certain that every measure will be taken to pay the country’s bills on time. Indeed, the United States has a near-perfect record doing so even when borrowing authority has expired.



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