This week, America got some exciting news -- in addition to the death of the world's most famous terrorist. It turns out the U.S. has three more weeks than initially thought until the nation could default on its debt. Treasury Secretary Timothy Geithner revealed yesterday that the new 'we really mean it this time' date is August 2nd, not July 8th. If the debt ceiling is not raised by then, the U.S. economy will face dire consequences.
Taxpayers Provided the Extension
First, let's go to an excerpt from the latest letter he wrote to Congress for the detail:
Largely as a result of stronger than expected tax receipts, we now estimate that these extraordinary measures would allow the Treasury to extend borrowing authority until about August 2, 2011, approximately three weeks later than was forecast last month. This is a projection and is subject to change based on government receipts and other factors during the next three months.
Just to be clear, the U.S. is still scheduled to hit the debt limit on May 16th. By now, it's pretty clear that we won't have an agreement by then. But at that time, Geithner intends to take "extraordinary measures" that will give Congress a little extra time to get its act together and raise the debt ceiling. Geithner says that higher-than-expected tax receipts will provide an extra three weeks for those extraordinary measures.
Why Reveal This?
Have you ever had a friend who is habitually late everywhere? If you need to meet him somewhere, you tell him to be there 30 minutes before you intend to arrive, so maybe he'll be there by the time you get there. Congress is like that friend. They never get anything done quickly. Complications often delay bills from their expected completion date.
So it sure would have been nice for the Treasury to keep mum on the extra cash they realized they had and keep that three week cushion to itself. Then, if Congress wasn't on course to make that earlier July 8th deadline, Geithner could say: "Listen you guys. I told you July 8th is the last day, but I found a way to give you three more weeks. You lucked out this time, but on August 2nd, you're really in trouble, because I'll have to start cutting important programs to avoid default."
So why did he reveal Treasury's realization? Because he had to. By law, Congress must be updated on the debt situation by Treasury, so he was forced to disclose the extra three weeks that Treasury analysts discovered. Of course, these sorts of deadlines are more an art than a science, so let's hope the Treasury is using a very conservative estimate to calculate the final-final date and it actually has an extra week or two before really, really extraordinary measures must begin to avoid default.
There's a problem with this new August 2nd due date: it edges right up to the last week of Congress' summer session before its month-long recession. Presumably, Congress will work past that deadline if it must in order to come to an agreement on the debt ceiling. But there could be a fear that if Republicans are not satisfied with the progress of the talks, they will shrug and say they're just going to take recess and deal with the debt ceiling when they get back.
To do so would be disasterous. The market will almost certainly hiccup if an agreement on the debt ceiling is not reached by August 2nd. Although the U.S. has come close to hitting the debt ceiling in the past, this time its debt is close to 100% of GDP. That scares investors a lot more than if debt was something like 30% of GDP. If an agreement isn't reached by late-July, expect to start seeing Treasury yields rise, even if technical default never occurs.