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BennyAndTheInkJets
Arkansas Fan
NYC / Orange County
Member since Nov 2010
4318 posts

What Actually Happens Oct. 17th

Contrary to what the media will tell you, on October 17th the world will still spin if we don't have a deal. The Treasury will have $30B on hand on 10/17 and will have ~$100B on 10/31. Then Treasury will then pull in ~$150-$200B of tax receipts a month and have ~$25-30B in debt servicing payments per month. The tax receipts are enough to fund 2/3rds of the government. The key here is the prioritization of payments, Goldman had a good write-up on ZH yesterday.

Jack Lew has indicated that the Treasury doesn't have the technology in place to easily prioritize payments, although I don't know many people that believe him outside of the 'easily' part. The issue is also if there is an executive order for payment prioritization and the political issues that may arise from this.

The market is not pricing in a default, there have been articles on CDS but US CDS is very thinly traded and these traders are just looking for a quick gain, not to actually hedge Treasury positions. There have also been articles on the October T-bill rates going to ~18bps while November bills only at ~3bps. This is moreso funds that just really don't want the headache of answering client questions about this as well as avoiding potential short-term losses given that uncertainty continues to rise as the deadline looms. A better proxy would be looking at Treasuries paying coupons on 10/31 and 4/31. The spreads between these two are very minimal.

Long story short (short story long), there is a very, very, very small chance we will default even given no deal by 10/17. The only things that could cause a default are either a substantial drop in tax receipts which is possible given an extended shutdown, or we actually prioritize payments away from debt servicing. If the latter happens, that would literally be the biggest mistake in Washington history. It's really hard for me to fathom a forceful default.


TheDiesel
LSU Fan
Houston via Baton Rouge
Member since Feb 2010
2508 posts

re: What Actually Happens Oct. 17th
Very informative article. I don't think they will make a decision before 10/17 so we will see how things end up.


BennyAndTheInkJets
Arkansas Fan
NYC / Orange County
Member since Nov 2010
4318 posts

re: What Actually Happens Oct. 17th
Agreed, no chance we have a debt deal before the very last minute.


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Cold Cous Cous
LSU Fan
Member since Oct 2003
14116 posts
Online

re: What Actually Happens Oct. 17th
With respect to prioritization, assuming it is technically feasible, who makes that decision? Can the executive unilaterally decide what liabilities get paid and which do not, or would it require Congress to act?


90proofprofessional
LSU Fan
Member since Mar 2004
11631 posts

re: What Actually Happens Oct. 17th
from the OP article:
quote:

It is worth noting that those principal and interest payments, unlike other Treasury payments, are made through the Fedwire system, which could allow easier segregation from other outlays.

Anyone know anything about the significance of this fact in detail? Seems absurd that we have no way to prioritize principal/interest above all else.

(It does seem much less absurd that we might not be able to prioritize different types of entitlement-payments from each other.)


BennyAndTheInkJets
Arkansas Fan
NYC / Orange County
Member since Nov 2010
4318 posts

re: What Actually Happens Oct. 17th
quote:

With respect to prioritization, assuming it is technically feasible, who makes that decision? Can the executive unilaterally decide what liabilities get paid and which do not, or would it require Congress to act?


You can have executive unilateral prioritization but this can also be challenged by Congress, but I seriously doubt the votes would be there in both houses although I would have to check which type of majority is required. Also the Supreme Court could challenge the President's right to defend the full faith and credit of the US government, but again that would take longer and it could essentially put the interest and principal payments up to a Supreme Court decision. I would hope that the issues of paying salaries versus entitlements would be a political issue rather than debt service, but then again that would make sense.


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BennyAndTheInkJets
Arkansas Fan
NYC / Orange County
Member since Nov 2010
4318 posts

re: What Actually Happens Oct. 17th
quote:

Anyone know anything about the significance of this fact in detail? Seems absurd that we have no way to prioritize principal/interest above all else.

You have to submit checks/payments to a vast array of government agencies to pay salaries. You would have to send checks/payments to large amount of hospitals, doctors, citizens, etc. to pay medical entitlements. All you have to do is send a book entry wire to banks to pay Treasury payments. It's just operationally a lot easier than dealing with the first two.


Nawlens Gator
Florida Fan
louisiana
Member since Sep 2005
2663 posts

re: What Actually Happens Oct. 17th

My hope is that the GOP stands its ground and refuses to raise the debt ceiling. Balancing the budget and prioritization of spending is something long overdue.



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Meauxjeaux
Memphis Fan
90248 posts including my alters
Member since Jun 2005
19128 posts

re: What Actually Happens Oct. 17th
quote:

(A) there is a very, very, very small chance we will default even given no deal by 10/17.


+

quote:

(B) The issue is also if there is an executive order for payment prioritization


=

IMO, there is a very, very, very large chance we will default even given no deal by 10/17.

The "default" word has been pushed into the low-information realm these last few days more than Miley rides wrecking (aka BBC) balls.

(B) is the pusher. Executive.


SpidermanTUba
LSU Fan
The COUNTRY
Member since May 2004
33381 posts

re: What Actually Happens Oct. 17th
quote:


Jack Lew has indicated that the Treasury doesn't have the technology in place to easily prioritize payments, although I don't know many people that believe him outside of the 'easily' part.


The Treasury makes 80 million payments a month, and did not design its system with prioritization in mind, and it lacks the authority to go and delete pending payments from the system without Congress telling it to. That means NSF.


BennyAndTheInkJets
Arkansas Fan
NYC / Orange County
Member since Nov 2010
4318 posts

re: What Actually Happens Oct. 17th
quote:

The Treasury makes 80 million payments a month, and did not design its system with prioritization in mind, and it lacks the authority to go and delete pending payments from the system without Congress telling it to. That means NSF.


As indicated above, the operational ease to pay debt payments versus all the other payments creates a pseudo-prioritization simply from it being the lowest hanging fruit and easiest to handle. It's going to suck for whoever is working the payment systems at the Treasury to manually handle all of this, that is a given, but debt servicing will be the least of that poor bastard's headaches.


BennyAndTheInkJets
Arkansas Fan
NYC / Orange County
Member since Nov 2010
4318 posts

re: What Actually Happens Oct. 17th
quote:

IMO, there is a very, very, very large chance we will default even given no deal by 10/17.

How do you get that conclusion from those two points? I can almost guarantee that the executive branch wouldn't purposefully choose to not service our debt given prioritization. The biggest threat of a default would be a drastic drop in tax receipts.


Volvagia
LSU Fan
Baton Rouge
Member since Mar 2006
41848 posts

re: What Actually Happens Oct. 17th
Human sacrifice, dogs and cats living together, mass hysteria!


LSU1018
LSU Fan
Baton Rouge
Member since Feb 2007
5612 posts
Online

re: What Actually Happens Oct. 17th
Do yall expect a temporary downturn of the market because of all of this or do you think it is already priced in?


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SpidermanTUba
LSU Fan
The COUNTRY
Member since May 2004
33381 posts

re: What Actually Happens Oct. 17th
quote:

It's going to suck for whoever is working the payment systems at the Treasury to manually handle all of this, that is a given, but debt servicing will be the least of that poor bastard's headaches.



I don't think it can be manually handled. That would be like asking the Census bureau to do its job without a computer. Its just not possible.

Do you realize how many checks that is? 80 million. ONE is late and investors go ape- shite.
This post was edited on 10/8 at 4:37 pm


BennyAndTheInkJets
Arkansas Fan
NYC / Orange County
Member since Nov 2010
4318 posts

re: What Actually Happens Oct. 17th
To this point:
quote:

I don't think it can be manually handled. That would be like asking the Census bureau to do its job without a computer. Its just not possible.

A good article from the FT on how the Treasury payments work.

A lot of the payments do have manual switches to turn on/off automatic payments, including the debt servicing payments.
This post was edited on 10/8 at 4:40 pm


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SpidermanTUba
LSU Fan
The COUNTRY
Member since May 2004
33381 posts

re: What Actually Happens Oct. 17th
quote:


How do you get that conclusion from those two points? I can almost guarantee that the executive branch wouldn't purposefully choose to not service our debt given prioritization. The biggest threat of a default would be a drastic drop in tax receipts.




I agree that Obama would use his executive authority at some point - but before it got that bad, Treasuries will have already had to have taken a big hit.


BennyAndTheInkJets
Arkansas Fan
NYC / Orange County
Member since Nov 2010
4318 posts

re: What Actually Happens Oct. 17th
quote:

I agree that Obama would use his executive authority at some point - but before it got that bad, Treasuries will have already had to have taken a big hit.

That's a hefty assumption. During the previous debt ceiling negotiations and rating downgrade, Treasuries rallied. Making assumptions on the Treasury market in general and positioning portfolio accordingly during these negotiations is a quick way to lose a lot of money.


90proofprofessional
LSU Fan
Member since Mar 2004
11631 posts

re: What Actually Happens Oct. 17th
quote:

I don't think it can be manually handled. That would be like asking the Census bureau to do its job without a computer. Its just not possible.

the mechanism of doing this is what was being talked about before you came up in here, braying

and the mechanism sounds credible, putting faith in Benny's take
quote:

ONE is late and investors go ape- shite.

one debt payment? yeah. one SSDI check? not convinced.
This post was edited on 10/8 at 5:02 pm


foshizzle
LSU Fan
Washington DC metro
Member since Mar 2008
32154 posts

re: What Actually Happens Oct. 17th
quote:

Do you realize how many checks that is? 80 million. ONE is late and investors go ape- shite.


Not true at all. Payments are routinely delayed for one reason or another in the normal course of business. Vendors aren't generally happy about it but the federal government is not always the fastest payer out there.


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