CBO Estimates Summer Default If No Debt Limit Deal Reached

The Congressional Budget Office shared a detailed analysis of when the U.S. might default if no debt ceiling deal was agreed after the U.S. hit the debt ceiling on January 19, 2023. Specifically the CBO estimates that extraordinary measures “will be exhausted between July and September 2023”.

The specific timing depends, in part, on tax receipts in April and the U.S. economy remaining broadly on course with CBO projections. This assessment is more specific than Treasury Secretary Yellen’s January 13, 2023 letter which estimated that, “it is unlikely that cash and extraordinary measures will be exhausted before early June.” Either way, to avoid default risk a debt limit agreement would need to be reached before the summer. Talks are in process to achieve that.

Choices When The Deadline Hits

The CBO finds that the U.S. would have a difficult choice were the deadline after extraordinary measures to be hit. The U.S. may “delay making payments for some activities, default on its debt obligations or both.”

Importantly, the CBO does not discuss a potential further round of more creative extraordinary measures as some have floated, such as minting a high value coin, or using certain Presidential actions to avoid default.

What Are Extraordinary Measures?

Extraordinary measures enable the U.S. government to keep operating for longer after hitting the debt ceiling, and have been in force since January 19, 2023. This involves delaying certain investments and redeeming others early. These are primarily investments that are made on behalf of current and former employees of the U.S. government for retirements and other benefits. This has been done previously and any outstanding payments were then made in full once a debt ceiling agreement is reached.

Precise Timing Of Default

The CBO’s report also suggested when during the month any default could occur. That might be around the turn of the month. That’s because three large expenses happen at that point. Firstly, a portion of interest payments are made on the last day of the month, and then around $40 billion of Medicare payments go out on the first day of the month, as does approximately $25 billion of military pay and benefits. If the government is running out of cash, these major outgoings may be enough to create default around the turn of the month.

Ongoing Discussions

President Biden and Speaker McCarthy are talking about the debt ceiling. Discussions on February 1 between the pair were described as “very good” with McCarthy expecting to reach a deal “long before” any default. Of course, there is risk from the Republicans’ slim majority in the House of Representatives, but any deal to raise the debt ceiling could be bipartisan.

Market Assessment

U.S. credit default swaps provide some measure of the default risk of the U.S. government. These have risen over recent months, but remain low in absolute terms. This suggests markets see some risk of default, but that it’s currently viewed as slim. The worrying case for these negotiations is 2011 when the U.S. came close to default, that rocked equity markets and caused the U.S. debt rating to be downgraded by S&P.

The U.S. has already reached the debt ceiling and extraordinary measures are being used. However, on recent estimates default would be unlikely to occur before the summer. That gives some runway for politicians to resolve the issue. The markets aren’t too concerned yet, but they do assess default risk as rising slightly.