AGF Management : Emergency Measures Considered as Talks Stall

WE SAID YESTERDAY that there would be no budget deal for many more days, and that still seems likely this morning - despite a consensus that spending "caps" are inevitable.

BOTH SIDES ARE FAR APART, with some Republicans questioning the validity of a June 1 "X-date." They think default is not imminent. That viewpoint may gain adherents, because the Treasury Department is telling agency heads to slow down payments, the Washington Post reports this morning.

THIS TACTIC is part of a scenario that could avoid a default until late summer. How could this happen? If Treasury could slow payments - or sell assets - it could limp through June 15, when major quarterly tax payments are due. That would give the debt managers enough money to avoid an imminent default.

TREASURY OFFICIALS HAVE TOLD AGENCIES - such as the Defense Department and the Centers for Medicare and Medicaid Services - to slow down their process for submitting payments.

TREASURY ALSO COULD SELL BONDS held by some of the government's massive trust funds, such as the Social Security Trust Fund or the Highway Trust Fund. That could raise tens of billions of dollars immediately, some experts say, and the trust funds could easily be made whole once the budget standoff ends.

AND TREASURY MIGHT FIND a few additional billions of dollars, the Post reports, by tapping the Treasury securities held by the Federal Financing Bank, which helps provide low-cost loans for federal programs. And Treasury could even sell off a portion of its $500 billion in gold reserves.

THE DIRECTIVE ordered agency officials to notify Treasury at least two days in advance of all "deposits and disbursements" between $50 million and $500 million. Payments above $500 million require five days notice, the memo said.

BOTTOM LINE: It's becoming clear that a final deal - with both parties in agreement and all the details in place - is unlikely by June 1. A deal by June 8 or 9 is possible, but if there isn't a deal, all eyes would be on the crucial date of June 15. It's not out of the question that Treasury might get to the June 15 tax collection date without a default. And then there's a huge tax haul coming in mid-September.

AS THIS HAPPY SCENARIO gains momentum on Capitol Hill, the immediate impulse will be to leave town for Memorial Day and hope for the best - the need for immediate action may fade. But the huge differences on spending cuts will persist; this Treasury gambit would only postpone the day of reckoning.

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