Silvia: Default can be avoided until September

The U.S. government can push back a threatened default at least until early September, a month after the Aug. 2 deadline set by the Treasury Department, said John Silvia, chief economist at Wells Fargo Securities LLC.

“The Federal Reserve and the Treasury can work together to generate enough cash probably for the next two or three months to avoid any kind of automatic default on the Treasury debt,” he said. “There’s a way of getting around this issue for at least another month or two.”

Political party leaders are preparing dueling plans for raising the U.S. debt ceiling, unable to break a partisan stalemate over how to tackle the nation’s $14.3 trillion debt by Aug. 2. That is the date when the Treasury Department says its borrowing authority will end, unless Congress raises the ceiling.

“It’s very unlikely that we’re going to default,” Silvia, who is based in Charlotte, North Carolina, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. He said the Treasury Department already has “cash flow that’s available” to avoid a government default for another two weeks after Aug. 2, before resorting to any special measures.

Greater-than-expected tax receipts might give the Treasury about an extra week, until Aug. 10, before it runs out of cash, Barclays Capital said in a report last week.

“Tax receipt inflows from July 14 to date have been considerably stronger than we were expecting,” New York-based Barclays analysts including Ajay Rajadhyaksha said.

Inflows over the five-day period from July 14 were about $14 billion higher than Barclays had expected and outlays were about $1 billion less, according to the report.

House Speaker John Boehner, an Ohio Republican, told party members he plans to force action on a two-step debt-limit extension that would provide a $1 trillion, shorter term increase than President Barack Obama has requested, defying a veto threat.

Harry Reid, the Senate’s top Democrat, prepared his own proposal, which would hand Obama the full $2.4 trillion in additional borrowing authority he has requested -- enough to last through the 2012 elections -- tied to a $2.7 trillion package of spending cuts that would leave Medicare and Medicaid untouched, according to a Senate Democratic aide.

Even if the two parties fail to reach an agreement to raise the debt ceiling by Aug. 2, officials will still be able to stave off a default for at least a month, Silvia said. Bond investors have realized they will probably still get paid in the event the impasse goes past the deadline, which means they won’t act as so-called bond vigilantes.

‘Bond Vigilantes’

“The bond vigilantes are probably figuring out that they will get paid, they are the number one in line,” he said. “Certainly Secretary Geithner doesn’t want to be the one on his watch to quote default.”

The term “bond vigilantes” refers to investors who protest inflationary monetary or fiscal policies by selling bonds and driving up government borrowing costs.

Regarding entitlement programs like Social Security and Medicare, Silvia said, “there’s probably enough cash to make those payments as well.”

“It really comes down to who’s third or fourth in line and it’s the federal government contractors and some federal government employees that may have some temporary furloughs,” he said.

Still a Risk

Silvia cautioned that there is still a risk that the U.S. will lose its AAA debt rating.

“OK you’ve got a deal, the debt ceiling’s raised -- that’s not the issue,” he said. “The issue is what are the details behind that, that alter the long-term trend in terms of federal spending and the deficit and that’s what the credit agencies are talking about.”