How Syria, a Hurricane, or Ben Bernanke Could Move the Debt-Ceiling Deadline

4 possible paths to an early default.

From hurricanes to monetary policy, there are plenty of events beyond the Treasury Department's control.
National Journal
Matt Berman Patrick Reis
Aug. 27, 2013, 9:23 a.m.

Dead­locked over a deal to raise the debt ceil­ing, Con­gress and the White House are flirt­ing with a fed­er­al de­fault. But that’s not the worst of it: Be­cause the ex­act date of de­fault is un­cer­tain, any num­ber of un­fore­seen events could push our fed­er­al fin­ances over the edge.

Treas­ury Sec­ret­ary Jac­ob Lew told Con­gress on Monday that the gov­ern­ment is likely to de­fault on its debts by mid-Oc­to­ber un­less the debt lim­it is raised. But mid-Oc­to­ber could just as eas­ily be early Oc­to­ber. Or it could be late Septem­ber. Or Treas­ury’s ex­traordin­ary meas­ures may, as some ana­lysts are still pre­dict­ing, stave off de­fault un­til Novem­ber.

Set­ting an ex­act de­fault date is dif­fi­cult, if not im­possible, be­cause the gov­ern­ment’s day-to-day fin­ances are dic­tated by a wildly un­pre­dict­able cock­tail of polit­ic­al, eco­nom­ic, and nat­ur­al forces. Here are a few hy­po­thet­ic­als that could buy Con­gress more time — or trig­ger de­fault more quickly than any­one saw com­ing.

Syr­ia

Few events wreak more hav­oc than mil­it­ary in­ter­ven­tions. Fed­er­al budgets, of course, do not es­cape un­scathed. And now it’s look­ing like there’s a de­cent chance there will be some form of U.S. in­ter­ven­tion in Syr­ia.

Such an in­ter­ven­tion, even if it’s just a tar­geted mis­sile strike, could cost bil­lions of dol­lars and al­ter the debt-lim­it timeline. In Ju­ly, Joint Chiefs of Staff Chair­man Mar­tin De­mp­sey told Con­gress that the cost of tar­geted strikes against Bashar al-As­sad’s mil­it­ary “would be in the bil­lions” and that just in­sti­tut­ing a no-fly zone over the coun­try would cost about $1 bil­lion a month.

One oth­er way of think­ing about the pos­sible cost of tar­geted strikes is to look back to the 1999 NATO re­sponse to eth­nic cleans­ing in Kosovo, which the Obama ad­min­is­tra­tion is re­portedly cit­ing as a “pre­ced­ent” for a pos­sible Syr­ia cam­paign. NATO con­duc­ted strikes on Ser­bia for 78 days start­ing in March, at a cost to the U.S. of about $5 bil­lion (not ad­jus­ted for in­fla­tion) through Septem­ber 1999.

Act of God

By late Novem­ber of last year, New Jer­sey Gov. Chris Christie es­tim­ated that su­per­storm Sandy had cost his state $36.8 bil­lion after mak­ing land­fall in Oc­to­ber. Around the same time, New York Gov. An­drew Cuomo was ask­ing for $41 bil­lion in fed­er­al aid for his state, with $15 bil­lion go­ing to New York City alone.

After months of ar­guing, Con­gress ap­proved a $50.5 bil­lion aid pack­age in Janu­ary. That’s a bit more than the amount of money the Treas­ury ex­pects to have on hand come mid-Oc­to­ber. And we’re about to hit peak hur­ricane and trop­ic­al-storm sea­son.

A massive storm or hur­ricane isn’t likely to drastic­ally (or quickly) al­ter the Treas­ury’s debt-ceil­ing es­tim­ate, and Sandy was surely something of an out­lier. It would have to be a “pretty big” storm to make a siz­able dif­fer­ence, says the Bi­par­tis­an Policy Cen­ter’s Steve Bell, and Sandy was one of the biggest ever. But when every bil­lion counts, an un­ex­pec­ted act of God could make the dead­line rush up just a bit quick­er.

Act of Bernanke

It’s the eco­nomy, stu­pid. The strength of the U.S. eco­nomy largely dic­tates how much tax rev­en­ue hits Treas­ury’s cof­fers, and if the re­cov­ery takes flight this fall, it could buy the gov­ern­ment more time, says Bill Fren­zel, a guest schol­ar at the Brook­ings In­sti­tu­tion.

Eco­nom­ic growth, however, is a double-edged sword be­cause any num­ber of shocks could blow a hole in the re­cov­ery, send­ing tax rev­en­ue crash­ing and ac­cel­er­at­ing the de­fault date. Think back to 2008, when the gov­ern­ment was ex­pect­ing the eco­nomy to keep chug­ging along and provide a steady rev­en­ue stream. But by mid-Oc­to­ber, fin­an­cial firms were col­lapsing, the eco­nomy was con­tract­ing, and a series of con­fid­ent rev­en­ue ex­pect­a­tions ended up be­ing wildly off.

And then there’s Fed­er­al Re­serve Board Chair­man Ben Bernanke, who — with fisc­al policy locked in a per­petu­al stale­mate — ar­gu­ably wields the na­tion’s last policy lever in his cent­ral bank’s mon­et­ary policy. But after years of provid­ing un­pre­ced­en­ted stim­u­lus, Bernanke has been send­ing sig­nals that the bank may soon back off.

That taper­ing could send shock waves through a stock mar­ket that many have long ar­gued is over­due for a con­trac­tion. Giv­en that stocks shuddered in June when Bernanke said the Fed would even­tu­ally taper, provided the eco­nomy stayed strong, the de­cision to peel back on some — but not all — of its stim­u­lus ef­forts would likely set back the eco­nomy and move up the de­fault date.

The Debt-Ceil­ing De­bate It­self

The very pos­sib­il­ity of de­fault could ac­cel­er­ate the debt ceil­ing’s ar­rival. In 2011, in­vestors got jit­tery as the due date drew near and the White House and con­gres­sion­al Re­pub­lic­ans were mired in stale­mate. The Dow dropped nearly 2,000 points from late Ju­ly to mid-Au­gust of that year, a plunge the mar­ket did not undo un­til 2012.

At a time when Treas­ury is scrap­ing for every tax dol­lar, a sim­il­ar mar­ket run could be enough to tip the needle.

There are signs, however, that the mar­ket has been in­ocu­lated against D.C.’s drama. When Con­gress took the coun­try to the edge of the fisc­al cliff in late 2012, mar­kets didn’t budge, prompt­ing many to spec­u­late that in­vestors no longer buy hard-liner bluster and just as­sume a last-minute deal is com­ing.

Either way, Con­gress’s day of reck­on­ing is com­ing, be­cause — ab­sent le­gis­la­tion ex­tend­ing the ceil­ing — no up­com­ing event will long delay de­fault, Fren­zel says.

“I think we’ve taken it just about as far as we can go,” he says. “I wouldn’t ex­pect any mir­acles.”

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