Jan 17, 2023 - Economy

Debt ceiling fight is just getting started

U.S. debt limit and outstanding debt subject to the limit
Data: U.S. Treasury Department, FactSet; Chart: Thomas Oide/Axios

We're in the first inning of another seemingly inevitable debt limit fight.

Driving the news: Treasury Secretary Janet Yellen informed Congressional leaders Friday that the federal government would likely hit the debt limit on Thursday. As a result, Treasury will have to take "extraordinary measures" to keep paying creditors who own the U.S. government's bonds.

  • These measures are things like running down Treasury's cash balances and delaying making payments to certain government pension funds, to make sure there's enough money to pay bondholders.

The big picture: Votes to raise the debt ceiling — once a bipartisan chip shot — have become increasingly fraught in recent years, typically when Republicans are in control of the House of Representatives and Democrats hold the White House, as is currently the case.

  • In 2011, a chaotic fight over raising the debt limit pushed the federal government near default, caused a sharp stock market downturn and ultimately prompted credit rating agencies to downgrade the national credit rating.
  • Some analysts think hardline members on the extreme right of the Republican House conference could be willing to create a similar situation this time around.

State of play: While Yellen's statement may sound alarming, it doesn't mean that Uncle Sam is actually on the brink of running out of money and stiffing creditors.

  • In her letter, she notes that the extraordinary measures should be enough to ensure the government can continue to meet obligations to bondholders until June.

Between the lines: Wall Street analysts think, if push comes to shove, the government can continue to pay bondholders until sometime in August or September.

  • But after that, Uncle Sam might actually be forced to default on its debt, an event that could seriously shake the foundations of the global market and financial systems.

Worth noting: So far, there's little sign that the market is worrying too much about the threat of a serious crisis. (Though if you squint hard at Treasury futures you can see some indication traders see trouble brewing in the late summer and early fall.)

What they're saying: "Any resolution will go down to the wire," analysts with Bank of America wrote in a client note Friday.

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