Bank of America analysts wrote in a note to clients this week that a U.S. debt default in late summer or early fall is “likely,” while Goldman Sachs called the possibility that the U.S. government would not be able to make good on its bills a “greater risk” than at any time since 2011.
Issue
Today entitlement spending comprises 64% of the federal budget and continues to grow unsustainably. That is why a small group of House GOP hardliners want significant spending cuts in return for increasing or suspending the $31.4 trillion debt limit.
House Speaker Kevin McCarthy (R-Calif.) negotiated on this topic with his 20 conservative holdouts to finally attain the speakership. He agreed that the GOP House wouldn’t move to lift the debt ceiling unless Congress slashes at least $130 billion in federal spending next fiscal year or addresses broader fiscal reforms that tackle the ballooning debt.
Read more: Kevin McCarthy Finally Won the House Speaker Gavel, Now What?
Timing
Wrightson Research’s debt default deadline current estimates suggest that it is unlikely that the crunch date will arrive as early as the first half June.
“If the Treasury is able to stay in business without a debt ceiling fix until June 15, it would probably not face a new deadline until mid-July at the earliest. June 15 individual and corporate taxes would tide it over the second half of June, and some additional accounting flexibility would become available at the end of June. In our base case, things might start to come to a head quickly in the second half of the month.”
Read more: U.S. Could Run Out of Money by Thursday if the Debt Limit Isn’t Lifted
Treasury Secretary Janet Yellen suggested last week that the deadline won’t be before “early June,” but she didn’t provide a specific deadline.
Political Waves Begin
Senate Majority Leader Chuck Schumer (D-N.Y.) in a statement said: “America pays its debts. Period. There should be no political brinkmanship with the debt limit. It’s reckless for Speaker McCarthy and MAGA Republicans to try and use the full faith and credit of the United States as a political bargaining chip. A default would be catastrophic for America’s working families and lead to higher costs.”
As for the White House, “We’re not going to negotiate on this,” White House Press Secretary Karine Jean Pierre reiterated to reporters Tuesday, insisting that the debt limit will be raised “without conditions.”
Strategy
Politico says the White House “is already working behind the scenes to work around...McCarthy, including dispatching its top advisers to meet with moderate Republicans – particularly those who won in districts...Biden won in 2020 – in hopes...those GOP lawmakers [will decide to] cross the aisle and lift the debt ceiling.”
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But other House Republicans “think the White House needs to come at it differently for officials to have any hope at cross-aisle cooperation.”
Impacts
The New York Times says, “Wall Street analysts and political prognosticators are warning that a perennial source of partisan brinkmanship could finally tip into outright catastrophe in 2023.”
According to the NYT, “Big investors and bank economists” 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.”
Bottom Line
“It’s playing a game with the U.S. economy and people’s lives that I think is irresponsible.” — Wendy Edelberg, a senior fellow in economic studies at the Brookings Institution, on the debate in Washington over whether Congress should raise the debt ceiling to allow the country to pay its obligations, including to Social Security recipients and federal contractors.
