Margarita M. Phillips 
As Washington draws closer to a possible midnight government shutdown on Thursday, here’s why the state of the country’s debt ceiling could cause more concern in financial markets.
September 30 marks the end of the federal government’s fiscal year and the deadline for Congress to pass a fundraising measure. The debt ceiling, which is the amount of money lawmakers allow the Treasury Department to borrow, must be suspended or raised by October 18, according to Treasury Secretary Janet Yellen, or the United States will do so. probably default on their debt.
Importantly, no one knows for sure when the US Treasury will run out of money to pay its bills, including bondholders, let alone what would happen next. U.S. sovereign debt has generally been viewed as the safest and most liquid to hold in the world, and all manner of financial market products and processes have been linked to the orderly functioning of the nearly $ 21 trillion treasury market. .
Yet after a few years in reverse in which the previously unthinkable has become reality, some professionals in Washington and Wall Street are bracing for the worst-case scenario.
“I see this as extremely slim chance, although with all the staging the possibility has been increased,†said Ben Koltun, director of research for DC-based Beacon Policy Advisors. “If that happens, it turns a fabricated political crisis into an economic crisis. The full faith and credit of the United States would no longer be full. “
The deadlock on Capitol Hill right now is over $ 3.5 trillion in spending.
Is the United States going to run out of money?
In a research note released Sept. 22, Barclays analyst Joseph Abate noted that there is currently additional uncertainty about the debt ceiling, as it coincides with a funding plan that Congress must pass. In addition, the changes brought about by the pandemic have made it much more difficult to assess the status of expected payments and receipts from the Treasury Department.
While most analysts expected an “X date” to be mid-October, when the Treasury will run out of money to pay the bills, Yellen told congressional leaders on Tuesday that it would be October 18. “At this point, we would expect the treasury to end up with very limited resources that would quickly run out,†she wrote in an update.
Beacon’s Koltun, among others, believes the markets will start to get nervous even sooner than that.
Read: America runs out of cash between October 15 and November 4, as debt limit drama continues
The very idea of ​​an American default remains so incongruous that the reaction of financial markets is not the only unknown. The current confrontation in Washington has also raised big questions about the infrastructure of financial systems. It’s a bit like the year 2000 – no one knows how computers will react.
“We don’t believe and the market doesn’t think this is a likely scenario,†said Rob Toomey, SIFMA Managing Director, Capital Markets and Associate General Counsel. “But that would be a real problematic scenario for the system in general and operations and settlement in particular.”
Plumbing problems
SIFMA, the Securities Industry and Financial Markets Association, is the industry association that deals with the trading and settlement mechanisms of securities such as sovereign bonds. The group worked with financial infrastructure providers, including Fedwire and FICC, to try and come up with some sort of playbook. For now, two scenarios are possible:
If the Treasury Department knows it will miss a payment, it would ideally announce it at least a day in advance. This would change the maturity dates of the bonds in question: a Monday maturity date would be changed to Tuesday, a Tuesday maturity date would be changed to Wednesday, and so on. These revisions would be made day after day.
While this looks relatively tidy, it still leaves a lot of unknowns. On the one hand, this could divide the bond and treasury bill market into those that clear normally and those whose maturity dates are being massaged, SIFMA told MarketWatch. This means great uncertainty about prices and what it means for all downstream securities indexed to Treasury rates.
In a second scenario, which according to SIFMA would be very remote, the Treasury cannot or does not give any advance warning in the event of non-payment, and it just happens. It would be much more chaotic, “a real problematic scenario”, as SIFMA puts it.
Oddly enough, the titles in question would probably simply disappear from the system. That’s because if a bond is supposed to mature – and be paid – on a particular day, the system assumes it has. “It just illustrates the fact that the system was not designed for this,†notes SIFMA.
If this happens, there would be a holder registered for the debt the day before the due date, who would be entitled to be paid. However, it is also likely that the Treasury will pay additional interest to make the bondholder whole.
Many analysts, including Mark Zandi, chief economist at Moody’s Analytics, believe that a crisis in financial markets is very likely – think of the day in 2008 when Congress initially failed to pass the Troubled legislation. Asset Relief Program intended to deal with the financial crisis – would end one of the scenarios envisaged by SIFMA before they occur, or a few minutes after midnight on the day they occur.
What Koltun calls a “chicken game†can already hurt the economy. The last two times Congress almost failed to raise the debt ceiling, in 2011 and 2013, according to Moody’s Analytics, “the heightened uncertainty at the time reduced business investment and hiring and weighed heavily. on GDP growth. Without this uncertainty, in mid-2015, real GDP would have been $ 180 billion higher, or more than 1%; there would have been 1.2 million additional jobs; and the unemployment rate would have been 0.7 percentage point lower.
The uncertainty that reigned in the treasury market in 2013 cost taxpayers between $ 40 million and $ 70 million, Barclay estimates.
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