After the senior U.S. officials indicated that the Treasury won’t be able to make payments after “early June” if the debt limit is not increased, Goldman Sachs economists came out with different scenarios.
The banking giant estimates that the Treasury had around $160 billion in room under the limit as of May 17. About $85B is likely to be spent through June 1 while the cash reserves are likely to drop below $30B by June 8-9.
“At that point, we believe there are even odds that the Treasury exhausts its funds entirely,” the economists said in a note to Goldman’s clients.
Along these lines, they believe that Congress is likely to take action before the deadline.
“The most likely is a full-fledged deal that suspends the debt limit to early 2025 along with spending caps (70% chance). There is a small chance this could be announced over the weekend (10%) but we think a deal is more likely later next week (30%) or shortly before the deadline (30%),” the economists said.
On the other hand, the chances that a deal does not come together by the deadline are 25%.
“If so, the most likely outcome would be a short-term extension (15%). If not, the Treasury would be faced with a choice of stopping most payments while debt service continues (6%) or continuing to borrow in excess of the limit to make all scheduled payments (4%),” they added.
Goldman also sees a small possibility for the Treasury to push back the deadline based on the better-than-expected cash flow trends.
“However, given the clear risk of missing payments around June 8-9, a slight deterioration in withheld tax receipt growth, and the fact that lawmakers are scheduling around a June 1 deadline, a change at this point would be surprising.”
Overall, Goldman expects the deal will eventually be struck but says the market may price in additional risk before the debt limit crisis is finally resolved.