The Wall Street Journal’s “Washington Wire – Live Blog” on the debt controversy reported last night (see 915pm entry) that, according to UBS analysts, the real debt ceiling deadline (i.e., the point when the U.S. Treasury will no longer have sufficient funds to make all scheduled payments) is not August 2; they think it will hit sometime between August 8 and 10.
As a number of us have repeatedly said, breaching the debt ceiling would not trigger default — as Democrats and the media constantly claim (with little resistance from Republicans, who are thus helping the Left win the crucial language battle that will dictate the public’s understanding of what’s happening). Default would only happen if Treasury failed to pay interest on debts and satisfy debts that reach maturity. Failing to make other scheduled payments (e.g., furloughing government employees, canceling programs, closing bureaus, etc.) would not constitute default; it would constitute cutting unnecessary spending.
UBS’s chief of interest rate strategy, Chris Ahrens, also noted that there is a “rising probability” that U.S. debt will be downgraded from its AAA status. As I said over the weekend, that possibility looms regardless of whether there is a deal to extend the debt ceiling deadline, because it is an assessment of how serious the country is about getting spending under control. If a downgrade happens, the repercussions (see our Exchequer’s July 19 post) would make it even more difficult to get spending under control. That’s why it’s much better to make the hard choices now, while the ceiling remains an astounding $14.3 trillion. Extending our credit so that debt is soon 120 percent of GDP and rocketing toward Greek Debt/GDP levels would be reckless. What’s truly remarkable is that those for whom that is the solution are said to be the adults in the room.