Extra extraordinary measures

From: POLITICO's Morning Money - Friday May 26,2023 12:01 pm

May 26, 2023

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Programming Note: We’ll be off this Monday for Memorial Day but will be back in your inboxes on Tuesday.

As the U.S. inches closer to the possibility of defaulting on some of its payments, there has been a flurry of suggestions on how the government could buy time before negotiators reach an agreement to raise the debt limit. Sell off assets. Reprice the gold at Fort Knox. Invoke the Constitution. One idea out there that hasn’t gotten much ink: Special drawing rights.

SDRs are assets issued by the International Monetary Fund that can be converted into major currencies (dollars, euros, yen, etc.), and they’re used as a means of providing aid to developing countries. But the U.S. also holds more than $150 billion worth of these assets.

One way Treasury could push back the X-date: Borrowing from the Fed against these assets, which, because of government accounting, wouldn’t count against the debt limit. And it could theoretically give the U.S. until August, said Lou Crandall, chief economist at Wrightson ICAP, one of the firms that most closely tracks the inflows and outflows from the government’s coffers.

Those assets are held in the Exchange Stabilization Fund, which MM readers may remember was the pot of money used to backstop emergency Fed lending during the pandemic.

Crandall adds: “The ESF’s resources had played a critical role in the Fed-Treasury pandemic response as well as the current regional banking turmoil. I would really hate to be the Treasury secretary who had to waste that resource on a debt ceiling fight. Even if Congress agreed that it should be replenished, which is far from guaranteed, it would probably become just part of the standard toolkit in calculating future X-dates, which would hinder the Treasury’s ability to address future bouts of financial instability.”

There’s another reason to doubt the viability of this option. “Anything that inserts the Fed into the fray seems at best an uncertain proposition,” said Shai Akabas, the Bipartisan Policy Center’s director of economic policy. “If they’re doing this in the absence of a deal and it could cause a political firestorm, it seems unlikely the Fed’s going to be willing to do that.”

For their part, Treasury and the Fed did not offer MM guidance on whether this would be considered.

But it’s a perfect microcosm of the situation the Treasury finds itself in. Technically speaking, the government can find esoteric ways to forestall default, but it would only push back the deadline, not make it go away. And there is a cost to the U.S. standing in the world, said Simon Johnson, former chief economist at the IMF and now a professor at MIT.

To sell SDRs directly, Treasury would have to go to another government and swap them for their currency and then find a way to convert that into dollars — something Johnson called “a public relations nightmare.” Borrowing through the Fed would be much simpler, he said, but again, “it’d be a loss of face for the U.S.”

"Even to pledge them to the central bank is a bit embarrassing,” Johnson said.

IT’S FRIDAY — We hope you have a restful Memorial Day Weekend. That is, unless you’re one of the people responsible for making us work over Memorial Day Weekend. If you are one of those people, send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.

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Driving the day

Commerce will release April PCE data at 8:30 a.m. The median estimate for Core PCE is 4.6 percent … Consumer sentiment survey data is out at 10 a.m. … … IMF Managing Director Kristalina Georgieva holds a briefing on the U.S. economy at 1 p.m.

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DEBT LIMIT FIGHT

Almost there? — Our Katherine Tully-McManus, Daniella Diaz and Jennifer Scholtes: “With seven days until the earliest possible federal default, negotiators appear to be inching closer to a deal, according to multiple people close to the talks, as Republicans and the White House work to close the critical gap on spending levels.

“Emerging from Speaker Kevin McCarthy’s office midday Thursday, Rep. Patrick McHenry (R-N.C.) said negotiators are ‘on approach on so many issues.’”

— McHenry gave another update later in the afternoon: “I think there's a sense of understanding from both teams that we have serious issues still to work out and come to terms with. And that's going to take some time,” he said, per NBC’s Frank Thorp.

But, but, but — Don’t turn off notifications for Memorial Day Weekend just yet. Even if a deal’s announced later today or over the weekend, leadership still has to whip votes with narrow majorities in both houses.

— Some House Republicans are already turning up their nose at areas where President Joe Biden and McCarthy’s emissaries have gotten close. That includes agreements to lift the debt limit through 2024, a procedure in place to incentivize Congress to pass all 12 spending bills and a plan to claw back unspent Covid money, Olivia Beavers and Sarah Ferris report.

— And some House Democrats are claiming that the Biden administration’s messaging put them in a position to have to make concessions on key policy areas. “The president should be out there,” said Rep. Rosa DeLauro of Connecticut, the top Democratic appropriator, according to Jennifer Haberkorn and Adam Cancryn.

— Meanwhile, in the Senate, Mike Lee (R-Utah) on Thursday tweeted that he would “use every procedural tool at my disposal to impede a debt-ceiling deal that doesn’t contain substantial spending and budgetary reforms. I fear things are moving in that direction. If they do, that proposal will not face smooth sailing in the Senate.”

Default is not the only bad outcome — Once the U.S. starts missing payments, “things go from being bad, to worse, to catastrophic” in a matter of days, said Mark Zandi, chief economist for Moody’s Analytics, told our Caitlin Emma and Jennifer Scholtes.

— Treasury’s cash balance is now below $50 billion. “This just shows you how close to the abyss we’re getting,” TD Securities strategist Gennadiy Goldberg told Bloomberg. “While some in Congress question the Treasury’s math, I think the cash balances speak volumes: we’re going to be going over the cliff very soon. Honestly, we’re on borrowed time.”

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Talking Points

New York hedge fund founder Anthony Scaramucci likes former New Jersey Gov. Chris Christie for the Republican nomination in 2024.

“You need somebody to take on Trump that has the stomach for Trump's nonsense, and can prosecute Trump for who Trump is on the stage. The governor has that skill set — he has that capability,” he told your host. The rest of the GOP field doesn’t “know the nature of that beast the way Chris Christie does. They don't have the moxie to take on Trump the way Gov. Christie does.”

Christie, who offered Trump one of his first major endorsements after wrapping up his own failed bid for the GOP nod in 2016, has become a major critic of the former president since 2020. The combative former governor left office in 2017 with dismal approval ratings but has maintained relationships with key Wall Street donors, including billionaire New York Mets owner Steven Cohen. Christie now sits on the team’s board of directors.

Christie has not formally declared but is expected to announce his decision in the coming weeks. One name the Mooch is cold on? Florida Gov. Ron DeSantis.

“He doesn't have the verbal dexterity. He doesn't see the punches coming. And he doesn't know how to respond to the punches, deflect punches and then counter punch,” he said.

Sure, but what if Trump ultimately wins the nom?

“I will do everything I can to support President Biden — or whoever it may be that's the nominee for the Democrats — because you can't have Donald Trump as the president,” said Scaramucci, who served a famously brief stint as Trump’s communications director in 2017 before being dismissed.

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In the markets

Yesterday’s MM aging like milk — The S&P 500 and Nasdaq climbed on Thursday on strong earnings from the chipmaker Nvidia, which pulled up tech stocks. Meanwhile, even after another credit ratings service threatened the U.S. with a possible downgrade, “investors watched for signs of progress in U.S. debt ceiling talks,” per Reuters’s Noel Randewich and Shreyashi Sanyal.

— Reuters’s Lucia Mutikani: “US labor market resilient; declining profits a red flag for economy”

Jeffrey Epstein — NYT’s Matthew Goldstein: “JPMorgan Chase faces a reckoning for its nearly 15-year relationship with the disgraced financier, one that could cost it a big payout in two civil lawsuits that claim the bank ignored warnings that he was trafficking teenage girls for sex because it was profiting from its relationship with him.”

Pressure campaign — Bloomberg’s Alastair Marsh: “The world’s biggest climate alliance for insurers has started hemorrhaging members, after Republican attorneys general accused the group of antitrust violations.”

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