Much time has passed in the political dispute over raising the US debt ceiling without the parties having come closer together. This increases the likelihood that the U.S. Treasury Department will soon run out of money to meet its legal payment obligations. Treasury Secretary Janet Yellen reiterated on Wednesday that it was "almost certain" that her department would not have enough funds in early June.
Winand von Petersdorff-Campen
Economic correspondent in Washington.
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This renewed warning is based on recent tax revenue data. The funds are flowing much more sparsely than rating agencies such as Moody's had calculated. One reason is apparently that taxpayers in various states have been granted deferred payments after natural disasters that hit California, Florida and New York, among others. This diminishes hopes that the Treasury could stay afloat until June 15, when a large surge in tax revenues is expected.
The financial markets are alarmed
Investors have long been alarmed. This can be seen, among other things, in rising yields on one-month government bonds, which expire in June and thus possibly after the impending day of the empty treasury. Moody's Analytics expects the U.S. to prioritize servicing the bonds. This seems possible because these payments are made via Fedwire. This is a special transfer system just for the bonds.
According to Moody's, if the US were not to service its bonds, this would cause chaos in the financial markets and result in higher borrowing costs for the government in the long run. Investors in the one-month bonds do not seem to assume this scenario. But they are not sure that the payments will be made on time. They can be compensated for this risk. As a result, the interest costs of the Ministry of Finance are already rising.
Expert: Only violent eruptions could help
The crisis is also evident in another asset class: credit default swaps. These are financial instruments that allow investors to hedge against the U.S. government's default within a one-year period. They are now more than twice as expensive as they were in 2011, when the dispute over the debt ceiling led to the spectacular downgrading of the US rating from AAA to AA+ by the rating agency Standard & Poor's. The other major agencies maintained their top ratings for the U.S. at the time. In 2011, the warring parties reached a compromise – two days before the treasury was empty. At that time, share prices plummeted 17 percent and took weeks to recover.
Moody's Analytics chief economist Mark Zandi thinks it is possible that only today violent eruptions in the financial markets could bring the parties to compromise. His scenario assumes that the default does not last longer than a week. The financial crisis of 2008 provides a historical model. At that time, the congressional majority initially refused to approve the bailout program for banks, which triggered dramatic price falls. That could happen again now.
Moody's Analytics, for example, expects price slumps and large interest rate increases. One possible consequence is that short-term financing for day-to-day economic activities threatens to be blocked in the long term. In 2008, when these threatening scenarios became apparent, MEPs met again just days after the rejection of the bank bailout programme to give their blessing this time.
Dramas on the financial markets will bring politicians into line, at least Zandi hopes. Moody's Investor Service has made it clear that it will not downgrade the U.S. rating until a bond payment defaults. Fitch, on the other hand, said that it has taken the U.S. under "negative scrutiny." This means that the country could lose its AAA rating. Standard & Poor's has not yet announced how the dispute will affect its U.S. rating.