Such a Deal

So they made a deal. Let’s assume for just a minute that they actually can corral enough votes in both houses to pass it with the votes of the “moderates” of both parties within the next couple of days. That would be when the real trouble starts– dealing with the nuts and bolts of the fact that the US Government would still need to raise a whole lot of cash fast, in a market without Fed support (for the moment anyway), and where the world, its central banks in particular, are likely to be a whole let less pleasantly disposed toward lending the US Government countless billions every couple of weeks.

The New Yawk Times posted a nice time line of the government’s expected revenues and outlays over the next few days, estimating where the Treasury would run out of cash. It’s not perfect. I found a few mistakes right off the bat, but with it being 11 PM on a Sunday night, the chart is good enough for my purposes. Gotta sleep some time.

Here’s what they left out. The Treasury had $51.6 billion cash on Thursday, which is the last available Daily Treasury Statement. On Friday, based on last year, they disbursed around $25 billion, leaving $31 billion in the till, but they also settled $8 billion in new debt, bringing the cash balance to $39 billion. On Monday, they will issue a net of $43 billion in new debt, bringing the cash balance to $82 billion, less payments of around $27 billion. So at the start of the Times’s chart, the government would have somewhere around $57 billion on hand. If the Times’s figures were right, then the government would have enough cash to make it to August 11. However, the NYT does not appear to include a required CMB payoff on Tuesday of $12 billion. That means that D-Day would probably be August 8 or 9, by my back-of-the-envelope calcs.

So lets assume that the government sausage making gets done in time for the Treasury to start raising money before it defaults on something.

We know that they are going to start to need to raise a whole lot of extra money at the Treasury auctions to dig out of the $232B hole they dug since May. But that can wait. Most of it involves IOUs to government pension funds. They can spread that out over months or even a couple of years.

However, they will need extra cash immediately because the next big Treasury auction round would not be until the week of August 8 and settlement would not be until the 15th, and they will run out of cash a week before that.

Over the same week last year, outlays were $134 billion and revenue was $38 billion. That suggests that the government will need to auction, and settle by August 8, somewhere around $96 billion in new debt next week, just to get from August 8 to August 15 when they normally raise a chunk of new cash. Then they’ll need the usual big round of new debt to settle on August 15, auctioned right on top of that $96 billion or so. The original TBAC estimate called for $54 billion. So in a week’s time the Treasury will need to hit the market and raise around $150 billion in new cash, with Primary Dealers and other market participants having virtually no advance notice of what type of paper will be sold when. The last time the market faced anything like that was when they were raising money for the TARP in late August and September of 2008, and we know what happened to the stock market then. Splat!

Anyone who thinks that the crisis is over for the market has another think coming. Admittedly, we don’t know what the Mad Scientist Bernankenstein will do. Will he pick up the batphone and call his batty friends on the FOMC for a money blast to juice the market and send commodities to the moon? I doubt that anyone thinks that the government bond market would swallow such a move with a wink and a nod any more. Ben’s hands may be tied.

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