Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Programming Note: We’ll be off this Monday for Memorial Day but will be back in your inboxes on Tuesday. As the U.S. inches closer to the possibility of defaulting on some of its payments, there has been a flurry of suggestions on how the government could buy time before negotiators reach an agreement to raise the debt limit. Sell off assets. Reprice the gold at Fort Knox. Invoke the Constitution. One idea out there that hasn’t gotten much ink: Special drawing rights. SDRs are assets issued by the International Monetary Fund that can be converted into major currencies (dollars, euros, yen, etc.), and they’re used as a means of providing aid to developing countries. But the U.S. also holds more than $150 billion worth of these assets. One way Treasury could push back the X-date: Borrowing from the Fed against these assets, which, because of government accounting, wouldn’t count against the debt limit. And it could theoretically give the U.S. until August, said Lou Crandall, chief economist at Wrightson ICAP, one of the firms that most closely tracks the inflows and outflows from the government’s coffers. Those assets are held in the Exchange Stabilization Fund, which MM readers may remember was the pot of money used to backstop emergency Fed lending during the pandemic. Crandall adds: “The ESF’s resources had played a critical role in the Fed-Treasury pandemic response as well as the current regional banking turmoil. I would really hate to be the Treasury secretary who had to waste that resource on a debt ceiling fight. Even if Congress agreed that it should be replenished, which is far from guaranteed, it would probably become just part of the standard toolkit in calculating future X-dates, which would hinder the Treasury’s ability to address future bouts of financial instability.” There’s another reason to doubt the viability of this option. “Anything that inserts the Fed into the fray seems at best an uncertain proposition,” said Shai Akabas, the Bipartisan Policy Center’s director of economic policy. “If they’re doing this in the absence of a deal and it could cause a political firestorm, it seems unlikely the Fed’s going to be willing to do that.” For their part, Treasury and the Fed did not offer MM guidance on whether this would be considered. But it’s a perfect microcosm of the situation the Treasury finds itself in. Technically speaking, the government can find esoteric ways to forestall default, but it would only push back the deadline, not make it go away. And there is a cost to the U.S. standing in the world, said Simon Johnson, former chief economist at the IMF and now a professor at MIT. To sell SDRs directly, Treasury would have to go to another government and swap them for their currency and then find a way to convert that into dollars — something Johnson called “a public relations nightmare.” Borrowing through the Fed would be much simpler, he said, but again, “it’d be a loss of face for the U.S.” "Even to pledge them to the central bank is a bit embarrassing,” Johnson said. IT’S FRIDAY — We hope you have a restful Memorial Day Weekend. That is, unless you’re one of the people responsible for making us work over Memorial Day Weekend. If you are one of those people, send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.
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