As Debt Limit Threat Looms, Wall Street and Washington Have Only Rough Plans
Opinion
Jeanna Smialek and Joe Rennison
With days to go before the United States bumps up against a technical limit on how much debt it can issue, Wall Street analysts and political prognosticators are warning that a perennial source of partisan brinkmanship could finally tip into outright catastrophe in 2023. Big investors and bank economists are using financial models to predict when the United States, which borrows money to pay its existing bills, will run out of cash. They are assessing what it could mean if the government is unable to pay some of its bondholders and the country defaults on its debt. And they are gaming out how to both minimize risks and make the most of any opportunities to profit that might be hiding in the chaos. The need to start planning for a potential debt limit breach became more urgent last week, when Treasury Secretary Janet L. Yellen told Congress that the United States would hit its borrowing cap on Thursday. At that point, Treasury will begin using “extraordinary measures” to try to stay under the cap for as long as possible — but those options could be exhausted as soon as June. Congress places a limit on the amount of debt the country can issue, with a simple majority in the House and Senate required to lift it. That cap, currently $31.4 trillion, needs to be adjusted to allow the United States to borrow to pay for obligations it has already committed to, such as funding for social safety net programs, interest on the national debt and salaries for troops. Wrangling over lifting the borrowing cap has become a fixture, and this year is shaping up to be particularly complicated. Republicans hold the House by a slim majority, and a small but vocal faction of the party has won changes to the rules that govern legislative debate. They have made clear that they want deep spending cuts in exchange for raising the debt limit, and their empowerment could make this round of negotiations more likely to end in disaster. Bank of America analysts wrote in a note to clients this week that a default in late summer or early fall is “likely,” while Goldman Sachs called the possibility that the government would not be able to make good on its bills a “greater risk” than at any time since 2011. When the nation approached the brink in that episode, its credit rating was downgraded and wild market gyrations helped to force lawmakers to blink. In Washington, the Federal Reserve and Treasury are not publicly speaking about what they could do if an outright default were to happen this time, in part because the mere suggestion they will bail out warring politicians could leave lawmakers with less of an incentive to reach a deal. But they have a series of options — albeit bad ones — for mitigating the disaster if political impasse takes the nation up to or over the brink of default. It is tricky to guess exactly how financial markets will react, both because the timing of any default is uncertain and because many investors are waiting and watching to see what happens in Washington. But former government officials and cautious Wall Street observers warn that the effects could be significant. Markets have grown bigger and more complex since 2011, and an outright default could lead to mass selling, which would impair financial functioning. While the government has done contingency planning for a default, former officials say there is no foolproof option for staving off a disaster. What is the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the total amount of money that the federal government is authorized to borrow via US Treasury securities, such as bills and savings bonds, to fulfill its financial obligations. Because the United States runs budget deficits, it must borrow huge sums of money to pay its bills. The limit has been hit. What now? America hit its technical debt limit on Jan. 19. The Treasury Department will now begin using “extraordinary measures” to continue paying the government’s obligations. These measures are essentially fiscal accounting tools that curb certain government investments so that the bills continue to be paid. Those options could be exhausted by June. What is at stake? Once the government exhausts its extraordinary measures and runs out of cash, it would be unable to issue new debt and pay its bills. The government could wind up defaulting on its debt if it is unable to make required payments to its bondholders. Such a scenario would be economically devastating and could plunge the globe into a financial crisis. Can the government do anything to forestall disaster? There is no official playbook for what Washington can do. But options do exist. The Treasury could try to prioritize payments, such as paying bondholders first. If the United States does default on its debt, which would rattle the markets, the Federal Reserve could theoretically step in to buy some of those Treasury bonds. Why is there a limit on US borrowing? According to the Constitution, Congress must authorize borrowing. The debt limit was instituted in the early 20th century so that the Treasury would not need to ask for permission each time it had to issue debt to pay bills. “There is no good plan,” said Jack Lew, a former Treasury secretary during the Obama administration. “It’s a more dangerous time than ever before to test it.” Despite the risks, some financial pain may prove necessary to force lawmakers to reach a solution, said Daleep Singh, a former official at the Treasury, the Fed and the White House who is now the chief global economist at PGIM Fixed Income. “Treasury and the Fed have options, but none of them would pass the sniff test of credibility with markets,” he said. “Markets have to do the heavy lifting of creating the drama that the politicians need to compromise.” But investors may remain complacent for too long, said Mark Zandi, the chief economist at Moody’s Analytics, the research arm of the rating agency. “There may be less reaction until it’s too late,” he said. The New York Times
from Asharq AL-awsat https://english.aawsat.com/home/article/4110321/jeanna-smialek-and-joe-rennison/debt-limit-threat-looms-wall-street-and
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