Is August 2nd Really a Drop Dead Date?

By Craig Elder, Morningstar

The August 2^nd date is being questioned by some on the Street as a drop dead date. Barclays, in a note published last Friday, wrote that the date has already been flexible and that based on cash flow uncertainty about inflows and outflows, the date on which the Treasury will run out of cash will be around August 10 rather than the 2^nd of August. The assumption was that the Treasury, with a large Social Security payment due on August 3^rd, would need to execute a note and/or bond auction on August 2^nd to raise the funds to make this payment. However, actual inflows to the Treasury over a five-day period from July 14 have been about $14 billion higher, considerably more than the $2 billion shortfall the Treasury seemed to be facing on August 3^rd. Also, outflows have been about $1 billion lower than previously forecasts. This could allow the Treasury to make its payments past the August 3^rd date. However, it faces another large Social Security payment on August 10 and will likely have difficulty making that payment. The Treasury also faces a large interest payment on its debt on August 15.

The August 10 date is not much of an extension but could provide the White House and Congress valuable additional time to come to an agreement to a debt limit expansion; however, we do not feel that it will be enough to allow the “warring parties” to come to an agreement on deficit reduction in order to avoid a ratings downgrade.