Posted 11/10/2013 by Tarek Dale
The United States (US) Treasury has funds available to cover outgoing expenses
until approximately 17 October. It cannot borrow more because of a legislative limit on borrowing (the ‘debt ceiling’). While a major default by the US Treasury would be unprecedented, historical examples do provide some insight into the costs caused even by delays in raising the debt ceiling.
The US has a budget deficit (with less revenue than expenditure), and US Government spending depends in part on borrowing to fund Government activity. However, that borrowing is limited by a debt ceiling - a feature in United States Government under which the Congress has ‘placed a limit on the total amount of debt that the Department of the Treasury can issue’ (
Congressional Budget Office). The ceiling is not a limit on new spending commitments, but on the amount that the US Government is able to borrow (the US Congressional Research Service’s
recent note details the historical and legal aspects of the debt ceiling).
The US Treasury reached that debt ceiling in May, and since then has been taking
‘extraordinary measures’ to temporarily ‘pay the nation’s bills’. Even those extra steps are likely to be ineffective by around 17 October – at which point the restriction on further borrowing means the US Treasury may not be able to meet all its obligations, and could potentially default on some of its existing debt.
The
debt ceiling is different to the current ‘shutdown’ of the US Government. The shutdown occurs because the US Congress has not passed legislation authorising key spending, so workers are sent home and
programs are halted. The shutdown reflects a significant suspension of Government activities, while the debt ceiling is a limit on US Government borrowing.
The current shutdown and the failure to raise the debt ceiling are both related to the same political conflict. The Republican Party has a majority in the House of Representatives, while the Democratic Party has a majority in the Senate, and the President is a Democrat.
While an extensive literature on government (‘sovereign’) default exists (see, for example,
Tomz and Wright or
Das, Papaioannou and Trebesch), a default by the US (however minor) would be exceptional in being caused by a political constraint, rather than economic fundamentals. There are, however, some previous instances where US debt has approached the ceiling. It occurred previously in
1967,
1979,
1995, 2002-2004, and recently in 2011, when Standard and Poor’s rating agency
downgraded US debt.
Zivney and Marcus (‘
The Day the United States Defaulted on Treasury Bills’) provide details of a short period in 1979 when debt payments were delayed. Although the debt ceiling was raised on
15 March 1979, technical difficulties meant that a small number of repayments (approximately
$120 million between 26 April and 10 May, of $800 billion total debt) were delayed (meeting the broader definition of default as not paying on time, in full). Zivney and Marcus analysed market interest rates on Treasury bills and concluded that the default resulted in higher borrowing costs. In 1995, another last minute
refusal to raise the debt ceiling resulted in higher borrowing costs, even without delays in payment (
Nippani, Liu and Schulman).
In its
assessment of the the 2011-12 debt ceiling debate, the US Government Accountability Office concluded that ‘Treasury’s borrowing costs modestly increased during debt limit debates in 2002, 2003 and 2010 ... increased borrowing costs also occurred during 2011’. A similar process is currently occurring, as lenders
charge higher rates for debt that is due to be repaid around 17 October.
If the debt ceiling is not raised, the effects of a major default are highly uncertain, but would be significant. US Treasury bills play an
important role in the international financial system, and
technical difficulties and the uncertainty created even by minor payment delays could cause significant disruption. A
US Treasury report warned of significant impacts on household and consumer confidence, and International Monetary Fund president Christine Lagarde said “
failure to raise the debt ceiling … could very seriously damage not only the U.S. economy, but the entire global economy”. A default also has geopolitical implications– China’s premier has
expressed concern about the debt ceiling. China holds approximately $1.3 trillion in US debt.
The debt ceiling is not merely an internal political constraint. Even the possibility of delayed payments is increasing borrowing costs for the US Government. The eventual political outcome and broader economic impact remain uncertain. Some useful background and context can be found from the
US Congressional Budget Office,
US Government Accountability Office,
US Congressional Research Service,
US Treasury and the
Bipartisan Policy Centre.
Data from: US Treasury Monthly Statement of Public Debt. The debt ceiling was suspended between February-May 2013.