On deck: a December to Remember
Once again, we have a delay in the debt ceiling consideration. It is a good development to dial back on the intensity of the debate for the time being. We know that the real consideration will not fade during this time. I keep asking myself how far the two sides will go to prove their points.
But come December, any temporary respite will be wearing off very quickly. Let us say that the prospective developments lead to a real default. Chaos will certainly ensue, and I am not speaking of the Maxwell Smart brand. Treasury levels would be expected to gap out and there may even be a pause in trading or effectively “no” market at least on a temporary basis. There is some historical precedence on a smaller scale for this hearkening back to the fiscal crisis in New York City and during the tax debate leading to the Tax Reform Act of 1986 when it was not clear whether tax exemption would continue or not.
Even a technical default such as the one that happened in 1979 due to an operating glitch would not be taken lightly this time. The remedy would need to be very swift if the market would have the ability to right itself.
And what would this mean for municipals? We tend to underappreciate the link between the federal level and the states and localities. The latter are truly independent in the legal sense but there is still the consideration of the flowing of federal funds to the state and localities operations. Medicaid, TANF, and a host of other operations would be subject to some level of interruption however brief.
Most governments have some funds on hand to carry their operations at least for several days. But an extended outage would be expected to be quite harmful. Raising revenue to counteract such a development is not a quick process and would not be welcome at that precise time.
Many may find these conjectures unsavory but at times such as the present we are compelled to do so. The banks and financial institutions are certainly doing their scenario planning. States and localities should be doing the same.
The good news is that due to the American Recovery Act and due to reserve requirements during the pandemic, states, localities, and banks do have balances available to work with on a short-term basis if necessary.
Market access is another item to ponder in this environment. It would be far from clear about whether a state or locality would be able to tap the market if the federal government is exhibiting undesirable debt practices. We always like to maintain that financing can be achieved during a storm at a price. We may have a chance to evaluate the accepted wisdom.
The FOMC minutes may provide a modicum of guidance as to whether what the timing will be for the tapering. The debt ceiling consideration may influence timing but the status of the economy and the outlook for inflation will have a greater bearing. There is more talk of the “stickiness” of more recent inflation reports.
Those of us in municipals have appreciated the growing backlog at the Ports for a period. Credits have not been directly affected from the rating perspective to date. Now that the President has meet with ports and labor leaders that resulted in a ninety-day operating agreement, some of the credits including the Alameda Corridor would be expected to trade a bit better. But, in this tight spread market the difference may be imperceptible.
Rates are higher but are steadier than one would anticipate. More recent volume predictions for the year are calling for well over $400 billion and will be close to attaining last year’s level unless we experience a real jolt out of the federal level.
John Hallacy
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