Failure to raise the U.S. government's (Aaa stable) statutory debt limit before the Treasury has exhausted the "extraordinary measures" that it is using to fund the government's spending, does not mean that the U.S. is about to default on its debt, Moody's Investors Service says.
US Treasury Secretary Jacob Lew told Congress earlier this month that the government will have exhausted the measures in place to fund the government by, or around, November 3. Without an agreement to raise the statutory debt limit by then, the Treasury will be forced to begin cutting expenditures to ensure that its spending matches its income.
Moody's expects that an agreement to raise the debt limit will be in place before the measures are exhausted, and if not by then, certainly before November 15, when the Treasury is scheduled to make interests payments of $35 billion. If an agreement is still not in place by this time, the government could delay other expenditures to ensure it has enough cash to pay bondholders.
"Even if the debt limit is not raised, we believe the government will order its payment priorities to allow the Treasury to continue servicing its debt obligations," says Moody's Senior Vice President Steven Hess.
However, the risk that Congress will fail to raise the debt limit in time to prevent this scenario is small, Moody's says in a report.
In the unlikely event that an agreement is not reached, Moody's estimates that total government expenditures would have to be reduced by an average of 11 percent during the fiscal year 2016, so that it can run a balanced cash position.
However, on a month-to-month basis, the pattern of revenues and expenditures varies considerably, with five months of the year recording surpluses, while the other months are in deficit. November typically records a fairly large deficit, meaning that during that month expenditures would have to be cut by a larger percentage.
