Does the Government Shutdown Make a Debt Ceiling Crisis More Likely?

Markets don't think the shutdown will get hostage-taking out of the Republicans' system
At least somebody is enjoying the government shutdown (Reuters)

Is the government shutdown actually good news?

Well, not good news in the way Ted Cruz thinks. But good news in the way a Republican temper tantrum over the budget might make a Republican temper tantrum over the debt ceiling less likely. That's what Ezra KleinMatt Yglesias, and Joe Weisenthal think -- or hope. After all, a government shutdown is infinitely preferable to a government debt default. The former is like the economy having high blood pressure, and the latter is like a heart attack. So anything that pushes a voluntary default back into the realm of absurdist fantasy, even a pointless and mildly destructive shutdown, should be welcome news. Right?

Well, markets sure don't seem relieved about the shutdown. If anything, they seem to think the budget impasse has made a debt ceiling impasse more likely. You can see that in the chart below, which looks at the interest rate on ultra-short-term Treasury bills set to expire in the next few weeks. Those interest rates were pretty normal before the shutdown started on Tuesday (the purple line), but jumped soon thereafter (the blue and green lines). And they kept jumping on Thursday (the red line) when it became clear the Republicans hope to roll the shutdown and the debt ceiling into one mega-crisis, putatively to pursue an ever-elusive "grand bargain" -- but really because they want to take the biggest hostage possible. That's at least how Republican budget svengali Paul Ryan put it when he said he "like[s] combining all of our leverage, which is sequester and the debt limit." In other words, it's going to be awhile before we know for sure whether Republicans will let the government pay all its bills on time. That's not the answer markets were looking for.

But why have rates only spiked for T-bills maturing in mid-October, and not November too? Well, mid-October is when the debt ceiling hits and the government is most at risk of missing a debt payment. The Treasury would presumably try to prioritize debt payments above all else in such a scenario -- but maybe it can't. Or maybe it can, but there'd be a few glitches when it reprograms its 100 million monthly payments. In either case, there's a slight chance the government could miss a payment on debt that comes due when the debt ceiling comes due. That slight chance falls back down to zero for debt that comes due in November, because the debt ceiling crisis hopefully wouldn't last that long, and even if it did, it wouldn't be nearly as chaotic then as in its first few days.

This doesn't mean, though, that markets think any kind of default is likely. A 10 basis point increase in Treasury bill yields isn't nothing, but it isn't much either. And besides, we don't know how that 10 basis point increase would compare to a counterfactual world where the government wasn't shut down. It's possible, however unlikely, that Treasury bill yields would have increased even more than they already have absent the Republicans' budget histrionics. But the best reason to stop worrying, and love to ignore the debt ceiling is John Boehner said he would raise it with mostly Democratic votes if it came down to that or default. Well, maybe. As Ezra Klein points out, the sourcing on that is pretty thin -- it's just one anonymous House Republican. Boehner's spokesman, of course, was quick to reiterate that his boss still wants some kind of bargain, grand or otherwise, as a precondition for lifting the debt ceiling.

And that's why the shutdown may have made a default less remote: it's maybe added a grand bargain-sized degree of difficulty to raising the debt ceiling.

Presented by

Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

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