Forex Trading Library

US Debt Ceiling Meeting Postponed, and That’s Good News?

0 71

US President Joe Biden was scheduled to meet again today with congressional leaders to talk about resolving the debt ceiling. But it was abruptly postponed, without a reason given. A few hours later, it was reported that the delay was because staff discussions had made some progress. A new meeting is scheduled for next week, potentially so the leaders can announce the progress made by staff. Although, many in the markets remain skeptical.

June is seen as the deadline for reaching an agreement, meaning that there is still a month left to negotiate and generate headlines. Generally speaking, the art of brinkmanship doesn’t include reaching an agreement week in advance of the deadline. Past confrontations have come down to the very limit, and the market would likely be surprised if a resolution was reached this early.

Repeating 2011, or something else?

There have been confrontations over the debt ceiling in the past, but the most dramatic was back in 2011. Which is why the current situation is being compared to that crisis. In that instance, a deal was not reached until two days before the debt ceiling was expected to be reached.

This time around, US credit default swaps (CDS), which are how much investors must pay to insure against a default on the US debt, have risen to levels far exceeding what was seen in 2011. Part of that is because there are much higher interest rates now, and the government’s debt is significantly higher. Even if the ceiling crisis is resolved, there is still the pending issue of government deficits being extraordinarily high.

What exactly happens?

The debt ceiling shouldn’t be confused with the budget limit, another political pressure tool that sometimes coincides with the debt limit. Lack of agreement on a budget result in a government shutdown, as spending has not been authorized. That most recently happened in 2019. The debt ceiling is about issuing new debt to cover spending that has already been authorized.

Before the ceiling is reached, the US Treasury can initiate what are called “extraordinary” measures, such as prioritizing certain payments or accounting actions such as redeeming certain treasuries. There isn’t an exact estimated date for when the debt limit will be reached because officials can potentially come up with new ways to juggle payments. It also depends on how much tax the government receives. Typically, better economic growth translates into higher revenues, so if the US isn’t heading into a recession as many expect, it could have more time on the debt clock.

Potential reactions

The US has never hit the debt ceiling before, so if it were to happen, it’s uncharted territory. Markets would naturally not like that level of uncertainty. However, it doesn’t automatically imply an immediate default on debt. The Treasury could prioritize paying interest on bonds over other expenditures, which would avoid technically falling into default.

But it doesn’t have to go that far for there to be market consequences. In 2011, S&P cut the rating of US debt for the first time ever. Cutting the rating of debt increases borrowing costs, which in turn slows the economy. And the constantly rising CDS makes investing in US debt less attractive, weakening the dollar.

Trading the news requires access to extensive market research - and that's what we do best.

Leave A Reply

Your email address will not be published.