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Sean Callow, senior currency strategist at Westpac, points out that the current US debt limit which is now in place is at $22 trillion and the US Treasury cannot be a net issuer of debt until the limit is raised and so is once again commencing “extraordinary measures.”

Key Quotes

“In practice, the US is probably not in danger of default until perhaps early Q4, with September potentially quite turbulent in Congress.”

“US Treasury data showed a Q4 2018 deficit of -$319bn, 42% wider than Q4 2017. Driving wider deficits, the tax reform package was signed Dec 2017, taking effect Jan 2018, while spending has continued to grow.”

“Given that Congress has not taken action on the debt limit, from 2 March, the limit once again applies, at the level as of 1 March. Treasury can no longer be a net issuer of debt until Congress passes new legislation on the limit. An underlying budget shortfall will force Treasury to once again to draw on cash on hand plus “extraordinary measures” in order to avoid breaching the ceiling before Congress takes action.”

“How long Treasury is able to take such measures is unclear as always, given the lack of certainty over receipts and expenditure. The Bipartisan Policy Center estimates Treasury could run out of cash “sometime in the fall of 2019″ (late Sep-late Dec). Beyond this, the risk of default grows.”

“Actual default remains a very low probability, but the bitter partisan divide suggests potential for extra market volatility the longer it takes Congress to reach agreement. Their main options are raising the limit by a specific amount and suspending it for a given period. Suspension beyond the November 2020 elections would make political sense.”