U.S. Debt Limit Sufficient Until Early Next Year

Yesterday U.S. House and Senate leaders agreed on a plan to fund federal government operations following the close of the 2012 fiscal year on September 30. Today, the U.S. Treasury Department said that the federal government can pay its debt obligations through early next year:

Treasury expects the debt limit to be reached near the end of 2012. However, Treasury has the authority to take certain extraordinary measures to give Congress more time to act to ensure we are able to meet the legal obligations of the United States of America. We expect that these extraordinary measures would provide sufficient “headroom” under the debt limit to allow the government to continue to meet its obligations until early in 2013.

This announcement all but forecloses the possibility of a stalemate similar to last summer’s over raising the federal debt limit. Coupled with yesterday’s agreement, which still needs to be written into legislation and passed by Congress, the run-up to the fall elections will not be nearly as dramatic as last summer’s flirtation with the possibility that the U.S. would not be able to pay its debts.

One interesting question here is whether Standard & Poor’s will once again honor the U.S. with an AAA rating. Last year’s S&P downgrade of U.S. sovereign debt raised a storm of criticism, and this might be the firm’s best chance of winning back public opinion. Fitch Ratings recently affirmed its AAA rating on U.S. debt, while Moody’s has not changed its rating since last year.

Paul Ausick