After weeks of brinkmanship, it has come down to this: the biggest economy in the world is just hours away from exhausting its ability to borrow more money. U.S. lawmakers are very close to reaching a last-minute deal to lift the debt ceiling and reopen the government – which is very good news, since the path ahead is growing more perilous. The Senate reached an agreement on Wednesday that paves the way for renegotiating the debt ceiling.
Here’s what you need to know:
What happens on October 17?
Tomorrow is the day when the U.S. enters uncharted territory. On that date, the Treasury Department estimates that it will have used up all of its wriggle room to borrow under the current debt limit. Strange as it sounds, the U.S. government will be just like any homeowner or business whose line of credit is tapped out. From tomorrow on, the country will have to depend on the cash in its pocket – roughly $30-billion (U.S.) – and revenues from taxes to pay its bills. Those bills include interest payments on debt, cheques to retirees, and salaries for government employees and military personnel.
So, when would the U.S. default on its debt?
It’s hard to say with precision but experts believe it wouldn’t take long. According to the Congressional Budget Office, the U.S. would run out of cash somewhere between October 22 and the end of the month. The Bipartisan Policy Center echoed that conclusion, warning that the “X date” – the point at which the U.S. will be unable to pay its bills in full – will arrive some time between the 22nd and November 1st. It cautioned, however, that no one knows for sure and the date could arrive sooner.
Why aren’t investors freaking out?
Investors are watching this impasse very carefully and know that there are still a few days left before something truly awful happens. They continue to believe that U.S. legislators will find a way out of this mess before then, but they’re not taking any chances. Some portfolio managers and banks have pared or unloaded their holdings of U.S. Treasury securities that pay interest between now and the end of the month – just in case they are left holding instruments that could default.
When will investors panic?
Soon. So far today, markets are getting a boost from the prospect of a possible deal to resolve the crisis. But if no solid agreement has emerged by the end of the week – together with a clear timeline for getting it through the legislative process – the level of fear in markets is likely to escalate dramatically. No investor in the world wants to see the world’s leading economy acting like a deadbeat borrower who is faced with the dilemma of deciding which bills to pay while postponing others -- a maneuver that, in any case, would be fraught with legal and practical complications.
What are other dates to watch?
Some of the big bills coming due in the next two weeks include:
- $12-billion on October 23 for the Social Security benefits of retirees
- $6-billion on October 31 for interest payments on debt
- $55-billion on November 1 in retirement payments, health benefits, and money due to military personnel and veterans.
Also, the government issues short-term debt each week in order to pay off other debt that is maturing. This would continue in the second half of October because the process doesn’t increase overall debt. But, if spooked investors shy away from the weekly auctions, the U.S. could default on the maturing debt.
As that draws closer, experts foresee a spiral of rising interest rates, tanking stocks, financial mayhem and, ultimately, economic damage, both in the U.S. and beyond.