Treasury Secretary Timothy Geithner is facing a credibility issue.
For weeks, Mr. Geithner has sought to corral the political debate over raising the debt ceiling toward a live-or-die deadline of Aug. 2 - the day he says he will run out of accounting tricks to cover all of the U.S. government's bills. That would set the country up for default, unless it receives renewed borrowing authority.
The Obama administration has attached great urgency to Aug. 2, warning of economic calamity if legislators fail to end their impasse. Few doubt that a default by the U.S. would trigger major upheaval in capital markets and the global economy. However, many on Wall Street aren't convinced the country will necessarily be out of cash by that deadline.
"Is August 2 really 'August 2'?" economists at Barclays Capital in New York asked rhetorically in a research note this week that argues the Treasury has enough revenue coming in to keep it going for at least another week.
UBS Securities arrived at a similar conclusion. John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C., told Bloomberg Television that he thinks the Treasury and the Federal Reserve could co-operate to avoid default for at least a couple of months.
Some analysts say the Federal Reserve could come to the administration's aid to avoid default. The U.S. central bank could buy the government's gold, giving the Treasury Department enough cash to avoid default for about three months. The Fed could then sell it back to the Treasury when the crisis is over, Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington who worked at both the Fed and the Treasury, said in an interview with Reuters Insider last week. Others say the assets the Fed and Treasury absorbed during the financial crisis could be used to raise cash now.
The U.S. dollar stumbled Tuesday, falling to a record low against the Swiss franc after prime time television addresses by President Barack Obama and House Speaker John Boehner on Monday suggested Democrats and Republicans were split on how to raise the $14.3-billion (U.S.) debt limit. Yields on U.S. government debt, however, are little changed this week, showing investors don't yet see an elevated risk of payback.
Skepticism of the Aug. 2 deadline helps explain the relatively muted reaction in financial markets to the brinksmanship going on in Washington. The overriding bet so far is that the Treasury will pay its bills on Aug. 3, either as the result of an 11th-hour political compromise or further accounting magic on the part of the Treasury.
"When even Secretary Geithner can't scare the market into going down, then we really know the deadline is not credible," said Daryl Jones, director of research at New Haven, Connecticut-based Hedgeye Risk Management. Andrew Busch, Chicago-based global currency and public policy analyst at BMO Nesbitt Burns, said the Aug. 2 date lacks credibility because the Treasury previously extended its deadline and could do so again.
The threat of default and downgrades by credit rating agencies did little to prod the politicians Tuesday. Their debate appeared to enter a stasis, as legislators in the House of Representatives readied for a vote Wednesday on Mr. Boehner's proposal.
The leader of the Republican majority in the House is pushing a two-step plan that would implement about $1-trillion in spending cuts over 10 years, while lifting the debt ceiling by a similar amount. That would set up a second vote on the debt limit in 2012, to which Mr. Boehner would attach almost $2-trillion in additional reductions.
Officials in the White House have indicated the President would veto Mr. Boehner's program, and the leaders of the Democratic majority in the Senate say they would block it.
Senate Majority Leader Harry Reid is planning legislation that would lift the debt ceiling through 2013 and narrow the deficit over the next decade by $2.7-trillion. The White House supports Mr. Reid's initiative, and Bob Casey, a Democratic congressman from Pennsylvania, told an audience in Washington on Tuesday that he thought a "version" of Mr. Reid's plan could win over a majority in the House.
However, Mr. Casey said it might take "a couple" of votes to achieve a compromise between the House and Senate, suggesting the legislative haggling will extend into the weekend, if not the eve of the Aug. 2 deadline.
If Barclays Capital is correct, that scenario need not be so nerve-wracking. A July analysis by economists at the investment bank was in line with the Treasury's schedule. This week, analysts ran the numbers again and now predict that tax revenue is about $14-billion higher than their previous estimate, while government outlays have been about $1-billion lower. That should leave the Treasury with enough cash to get buy until Aug. 15 when a big debt payment is due, according to the analysis.
The administration, however, isn't budging.
Aug. 2 "is not a guess. It's not a political opinion," White House spokesman Jay Carney told reporters Tuesday. "It is the judgment of career analysts at the Treasury Department. Beyond that date, we lose our capacity to borrow."