p. 1

debt limit analysis july 2011

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p. 2

assumptions 2 · congress does not raise the debt limit before recessing on august 5 2011 · estimates for daily receipts and payments constructed from publicly available data from daily treasury statements

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p. 3

three questions 3 1 what is the date after which treasury will not have sufficient cash to pay all of its bills the x date if we pass the x date and treasury is forced to prioritize its payments to avoid a debt default 2 what would be the effects on government operations 3 what would be the market risks?

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p. 4

what is the x date 4 · the x date is the date after which treasury can no longer pay all of its bills ­ after x date bills must be paid solely out of incoming cash flows · on may 2 secretary geithner estimated that the x date will be august 2 adding ­ this is a projection and is subject to change based on government receipts and other factors during the next three months

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p. 5

what is the x date 5

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p. 6

no silver bullets to extend date 6 · our analysis also shows that the x date will fall on august 2 on july 1st treasury publicly reaffirmed their estimate of the x date as august 2 · the 14th amendment does not provide a reasonable basis for challenging the constitutionality of the debt ceiling ­ the administration will not attack the debt ceiling on this basis · treasury has no secret bag of tricks to finance government operations past august 2 ­ treasury will not attempt to firesale assets during a crisis ­ other ideas are impractical illegal and/or inappropriate gold loans ious

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p. 7

prioritization 7

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p. 8

prioritization overview 8 · there is no precedent all other debt limit impasses have been resolved without passing the x date ­ treasury has never failed during a debt limit impasse to meet any payment obligation · the government shutdown of 1995 ­ 96 does not provide a precedent ­ mandatory spending continued without interruption ­ defense transportation treasury and legislative branch spending was fully appropriated ­ disruption of government services was modest

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p. 9

prioritization 9 · rating agencies · s&p if you prioritize payments you would have to contract your payments in a massive way overnight [creating a very sharp negative fiscal impulse 4/18/11 credit watch negative · fitch if the debt ceiling is not raised and timely and full payment of its obligations including treasuries is not secure the u.s sovereign rating will be placed on rating watch negative · moody s the probability of a default on interest payments [is low but no longer de minimis an actual default regardless of duration would fundamentally alter moody s assessment and an aaa rating would likely no longer be appropriate · bernanke concurs · going past the x date would no doubt have a very adverse effect very quickly on the recovery i m quite certain of that

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p. 10

prioritization 10 · treasury would have to choose from among 80 million monthly payments so that 40-45 of bills are not paid ­ inflows and outflows do not match up well and are quite lumpy as our daily analysis shows · the reality would be chaotic ­ ­ ­ ­ unfair results unanswered questions treasury picking winners and losers public uproar intense global media focus · we assume that treasury would nonetheless be forced to attempt to prioritize payments despite difficulty of doing so

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p. 11

prioritization 11 two areas of risk evaluation ­ effect on federal government operations · month of august · day by day analysis ­ market risk

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p. 12

august 2011 analysis 12

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p. 13

prioritization monthly totals month/year inflows outflows deficit business days 13 august 2009 173,254 316,299 143,045 21 august 2010 august 2011 truncated 3rd ­ 31st august 2011 194,280 203,327 172,400 342,381 362,674 306,713 148,101 159,348 134,312 22 23 21 all numbers are pro forma for the exclusion of net debt issuance bpc projections in millions of dollars

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p. 14

illustrative scenario #1 protect selected big ticket programs 14 if you choose to pay program interest on treasury securities social security benefits medicare medicaid defense vendor payments unemployment insurance benefits cost $29.0 b $49.2 b $50.0 b $31.7 b $12.8 b for a total of $172.7 billion

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p. 15

illustrative scenario #1 protect selected big ticket programs 15 then you can t fund these programs worth $134 b program military active duty pay cost $2.9 b veterans affairs programs federal salaries benefits dep of education e.g pell grants special ed programs food/nutrition services tanf dep of labor e.g training and employment services dep of justice e.g fbi federal courts dep of energy e.g energy research national nuclear programs health and human services grants federal highway administration environmental protection agency irs refunds small business administration federal transit administration hud programs e.g housing assistance for the poor other spending $2.9 b $14.2 b $20.2 b $9.3 b $1.3 b $1.4 b $3.5 b $8.1 b $4.3 b $0.9 b $3.9 b $0.3 b $1.3 b $6.7 b $52.8 b

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