The T-bill that broke America’s credit [updated] | FT Alphaville

The T-bill that broke America’s credit [updated]

Hypothetically, obviously. At this stage.

Its CUSIP number is 9127953B5.

It was issued on 2 March 3 February 2011.

And it currently pays investors a princely yield of 0.018 per cent, for the (ahem) ‘risk’ of holding it.

Murmuring phrases like ‘tail risk’ and ‘crisis of governance’ on Wednesday, Fitch Ratings has released a kind of timetable for actions it would take in a US debt ceiling crisis.

It’s quite dispassionately detailed — and zeros in on one particular Treasury bill, which has the above features:

If contrary to expectations, an increase in the debt ceiling has not been enacted by 2 August (or the latest date specified by the most recent Treasury projection as to when the US government will not be able to securely honour its commitments), the US sovereign rating will be placed on Rating Watch Negative (RWN). At this point, the window before raising the ceiling and the US government failing to honour a debt obligation will rapidly close, given monthly budget deficits averaging some USD124bn. In the event that the US sovereign rating is placed on RWN, the ratings of financial institutions and other entities that are directly underpinned by support from the federal government would similarly be placed on RWN. However, the rating of US states and municipalities would at least initially be unaffected as their current ratings do not rest upon explicit support from the federal government.

The first test for a marketable (and Fitch-rated) Treasury security after 2 August is a USD30bn Treasury bill maturing on 4 August. In the event that this Treasury bill is not repaid in full on that date, Fitch would mark the default by downgrading the specific issue rating to ‘B+’ from ‘AAA’, the highest rating for a security in default on the expectation of full or near full recovery. However, Fitch would not necessarily place the US sovereign rating into default if it judged at the time that the non-payment would be cured in full (including the payment of accrued interest) before the next Treasury bill matures on August 11 (USD27bn).

If maturing Treasury bills are refinanced but the Treasury is unable to honour USD27bn of Treasury notes and USD25bn of coupon payments payable on some USD1trn of Fitch-rated Treasury securities due on 15 August, the US sovereign rating would be placed into the ‘Restricted Default’ (RD) category until the default event was cured.

From ratings watch negative to a downgrade in two days, to a default in a fortnight. Fitch adds that there would be a short to medium term period after default where the US would lack the former AAA rating. All starting with a T-bill that yields 0.018 per cent.

Crisis of governance? Quite.

Update – Speaking of T-bills triggering default… Donald Marron reminded everyone a while back that the United States failed to pay off bills maturing in April 1979, following a debt ceiling stand-off that March. History, farce, tragedy, and all that. (H/T Cardiff Garcia)

Related links:
Republican mainstream flirts with brief default – Reuters
Moody’s thinks about thinking about the US debt rating – FT Alphaville