Remember The Debt Ceiling?
As Erskine Bowles notes "Everyone claims that they’re not going to let our nation default. And Lord knows we all ought to pray that they don’t. But, could it happen? You bet." But it seems the world has forgotten that between the "grand bargain' negotiations and the looming final-final debt ceiling deadline, the US fiscal situation remains troubled at best. While Washington is "only capable of focusing on one big issue at a time," dominated currently by espionage, immigration, and scandals, Bowles notes, from mid-September to mid-November the fiscal issues will be forced into the headlines and he believes there is only a 20-25% chance a deal is struck. As Stone & McCarthy notes, the Treasury will exhaust its extraordinary measures to create borrowing authority on October 31, and run out of cash on November 1.
Via Stone & McCarthy,
- We expect the Treasury to exhaust its extraordinary measures to create borrowing authority on October 31, and run out of cash on November 1.
- Our "drop dead" date is about two months later than an earlier forecast. The main reason for the change is that we underestimated how much borrowing authority Treasury could create this time around.
- Our forecast assumes that Freddie Mac pays Treasury a $30.0 billion dividend at the end of September. That's not a given, though.
- Even without the dividend payment, Treasury could probably make it to November 1 without a debt limit increase.
We've updated our projections for when Treasury will exhaust its extraordinary measures that will allow it to borrow under the current debt ceiling. We now expect that Treasury will exhaust those measures on October 31, and run out of cash the next day, November 1.
We estimate that Treasury used $89 billion of its extraordinary measures as of June 30, leaving about $183 remaining.
Based on our projections for marketable debt issuance and SLUG redemptions, we think Treasury will use up that $183 billion on October 31. More specifically, we think Treasury would be about $30 billion short of the room needed to settle all of the auctions scheduled to settle that day.
Our projections assume that Freddie Mac will pay Treasury a dividend of about $30.0 billion related to the release of a valuation allowance against deferred tax assets on September 28. (For a related comment, see Agency Focus: Fannie and Freddie: The New Treasury Cash Cows? 4/2/13.) While that's our base case, we think there is some risk that Freddie won't release the allowance or only releases a portion of it. The language in Freddie Mac's first quarter SEC filing regarding the valuation allowance was a little more tentative than in Fannie Mae's fourth quarter filing. (Fannie Mae released its valuation allowance in the first quarter, and paid Treasury a $59 billion dividend at the end of June as a result.)
Here are some excerpts from Freddie Mac's discussion of the issue in its SEC filing:
"On a quarterly basis, we determine whether a valuation allowance is necessary on our net deferred tax assets. In doing so, we consider all evidence currently available, both positive and negative, in determining whether, based on the weight of the evidence, it is more likely than not that the deferred tax assets will be realized...
"In recent periods, certain of our negative objective evidence has been improving and could become positive as early as the second quarter of 2013. Specifically, we currently expect that we will no longer be in a three-year cumulative loss position...Due to the significant uncertainties related to the conservatorship and ongoing changes to our business as a result of public policy, it is very difficult for us to make projections concerning our financial performance beyond the near term. In addition, under our current base forecast we would need projected income over the next 17 years in order to fully realize our net deferred tax assets."
Even if Freddie Mac doesn't release the valuation allowance, and pays Treasury $30 billion less in dividends than we are currently projecting, our drop-dead date for the debt limit doesn't change. However, it would make it more definitive.
Our cash flow projections show Treasury with $7.0 billion less than it needs on November 1 if Freddie pays the full dividend; that shortage grows to $37.0 billion if Freddie doesn't pay the dividend related to the treatment of deferred tax assets. (We are assuming that each GSE will pay about $5 billion in dividends just based on quarterly profitability.) We will have clarity on this issue in a few weeks, when the GSEs release their financial results for the second quarter.