H.R. 807 (the Full Faith and Credit Act) and the Debt Limit

Loren Adler contributed to this post.

Tomorrow, the House of Representatives will consider H.R. 807, the Full Faith and Credit Act, which would alter the application of the debt limit to certain interest payments. The bill would allow the Secretary of the Treasury to issue new debt – even if it would otherwise cause the debt limit to be exceeded – for the sole purpose of paying principal and interest on debt held by the public and intragovernmental debt held by the Social Security Trust Funds. President Obama has announced that he would veto H.R. 807 if it reached his desk.

Our interpretation of the bill is that it would effectively exempt from the debt limit any debt issued to make interest payments on the public debt and to the Social Security Trust Funds that would have otherwise caused a breach in the debt limit. Therefore, once the statutory debt limit is reached on May 19 (the day on which it is reinstated from its suspension) and Treasury begins using “extraordinary measures” to pay bills, the aforementioned interest payments could be made without having to use those measures or cash on hand. Hence, H.R. 807 would delay when the U.S. reaches the X date, the day on which the nation can no longer pay all of its obligations on time and in full. The legislation would also seemingly allow the Treasury to temporarily issue additional debt beyond the limit if such issuances are necessary to facilitate the rollover of maturing debt.*

Previously, after making certain assumptions, we estimated that if the debt limit is not raised, the X Date is most likely to occur in early September or early October. If H.R. 807 is enacted by the end of May and the rest of our assumptions remain the same, the X Date would most likely be pushed back to November.

This type of projection several months in advance is highly uncertain, due to natural cash flow fluctuations, changes in economic conditions, or modified fiscal policy – all of which could affect the timing of the X Date. In the near term, we are also waiting to learn if Fannie Mae will pay an unusually large dividend to the Treasury, as well as the exact amount of the new debt limit on May 19. As always, we will update our analysis as more information becomes known.

* H.R. 807 would require the Treasury to report any exercise of this new authority on a weekly basis to the committees of jurisdiction in Congress.