As Debt Ceiling Approaches, Valid Reasons Emerge To 'Kick The Can Down The Road'

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by: Tortoise

Summary

U.S. is expected to reach legislatively-set debt limit.

Delay of debt ceiling driven by hurricane relief aid.

Risks of leaving the debt ceiling issue unresolved.

The U.S. is expected to reach its current $19.8 trillion legislatively-set debt limit sometime in early to mid-October. Without creative financing solutions from the U.S. Treasury Department, which only would provide a temporary delay, we would expect a temporary government shutdown, payment prioritization, or worst case scenario - a technical default on our debt.

We have witnessed several episodes of political wrangling in Washington D.C. as we have approached debt ceiling debates in the past, including 2011, 2013 and 2015, with the most severe resulting in a temporary partial government shutdown in October 2013.

Delay of Debt Ceiling Driven by Hurricane Relief Aid

Dealing with the debt ceiling is a necessity, although there is a good reason for the proverbial can to be kicked down the road this time around. Specifically, this past week President Trump and a majority of Congress agreed to a continuing resolution to suspend the debt ceiling until December 8th, fund the government, and most importantly provide hurricane relief aid. Given the dire and immediate needs of those in hurricane affected areas such as Texas, Florida and the Caribbean, a partial government shutdown, depletion of funds for FEMA, or lack of general relief aid from the government would have been catastrophic. While we applaud the efforts of our politicians working together in a bipartisan manner during a time of crisis, kicking this can down the road to December can and will create additional issues.

Risks of Leaving the Debt Ceiling Issue Unresolved

By kicking the budget and debt ceiling can down the road to December, we now face a showdown amongst politicians as we head into the holiday season with another threat of a potential government shutdown looming. In fairness, there has been speculation that the U.S. Treasury Department has some creative financing options that could delay a shutdown a couple of months, bringing "D Day" to sometime in the first or second quarter of 2018. The risk with leaving the debt ceiling issue looming much longer is it could distract Congressional focus away from achieving other important legislative agenda items, such as tax reform. If this distraction takes too long and isn't dealt with by the end of the year or early in Q1 2018, Congressional focus will likely turn toward the midterm elections by Q2 2018 thereby making most substantial policy initiatives very difficult to achieve until after the midterm elections. We believe the threat of a government shutdown or technical default is extremely low. However, substantial delays in President Trump's tax reform plan could have a negative impact on equity valuations, credit spreads and even push U.S. Treasury rates lower, all other things equal, as the positive boost to all the aforementioned post the election last year would get priced back out of the markets.

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