This to obviously become a bigger topic of conversation now that the Greek can’s been kicked…
“Our view is still that the debt ceiling will be raised in time to prevent any serious disruption to Treasury payments. …… We expected a compromise to emerge before the 2 August deadline, but the events of the past two weeks are not promising. Congress has been known to delay important budgetary decisions before. But if they do it this time, they definitely risk a negative reaction from the rating agencies.”
Risk of US sovereign debt default
Now that the immediate risk of a sovereign Greek debt default has been postponed, attention in global financial markets may swing back to the risks of a sovereign debt default in the United States. This note covers some of the issues surrounding the possibility that the US Treasury may run out of borrowing authority in early August.
Time is running out
There are only about four more weeks before 2 August, the date at which the Treasury has declared it will “exhaust its borrowing authority.” After that date, there is a serious risk that the Treasury will not be able to pay all its ongoing obligations. Even if the Treasury continues to make timely payments of interest and principal on its outstanding securities, its inability to make timely payments on other obligations could still threaten its current triple-A sovereign credit rating.
2 August still best estimate for deadline The Treasury reached its current statutory debt limit on 16 May. By 2 August, the Treasury estimates that the extra borrowing authority created by the disinvestment of retirement funds will be exhausted. After that date, the Secretary of the Treasury has indicated that the government may have to “default on obligations, such as payments to our service members, citizens, investors, and businesses.” If the Congress does not raise the debt ceiling by 2 August, the Treasury may start missing payments on some obligations starting 3 August.
Political calculations could lead to stalemate There is a growing danger that both Republicans and Democrats in Washington will calculate that they should not compromise because the other side will suffer more damage from a disruption to Treasury payments than they will. They cannot both be right, but if each side believes it will come out the winner, than they each have an incentive not to compromise. The risks could increase as we approach the 2 August deadline.
Our view is still that the debt ceiling will be raised in time to prevent any serious disruption to Treasury payments. Agreement on deficit reduction could be postponed while the debt ceiling is raised temporarily, say for a few months, giving Congress more time to negotiate an agreement. We expected a compromise to emerge before the 2 August deadline, but the events of the past two weeks are not promising. Congress has been known to delay important budgetary decisions before. But if they do it this time, they definitely risk a negative reaction from the rating agencies.
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http://www.easyforexnews.net/wp-content/uploads/2011/07/302201.pdf
HSBC Global Research