Congress Agrees on Debt-Ceiling Deal, Sidestepping Default Risk

(Bloomberg) -- Republicans and Democrats in Congress have agreed on a plan to break a partisan impasse and raise the government’s debt ceiling likely through next year, pulling the nation away from the brink of a default.

Senate GOP leader Mitch McConnell, who had vowed Republicans won’t cooperate in raising the limit, said Tuesday the deal he struck with Senate Majority Leader Chuck Schumer would enable a procedural maneuver to increase the government’s borrowing authority with only Democratic votes.

“I think this is in the best interests of the country,” McConnell told reporters at the Capitol, adding that it also was in “in the best interests of Republicans.”

Schumer said he wanted to avoid a lengthy and convoluted process and said “Democrats would carry the burden” of raising the debt limit.

The news quickly reverberated in the market for Treasury bills, with those maturing in December rallying as traders reduced the discount for the possibility of a delayed payment on the securities. Yields on bills maturing during the second half of December shed as much as 3 basis points after the debt agreement was reported, with the rate on the Dec. 30 bill falling to about 0.045%.

The plan, which was moving toward a House vote on Tuesday, would create a procedure to raise the debt ceiling with a simple majority in the Senate as part of a bill to prevent automatic Medicare cuts at the start of the new year. Once that passes, the 50-50 Senate would later act on the debt ceiling, sending that legislation to the House. Democratic senators said they are discussing an increase to allow borrowing through 2022, something that would take about a $2 trillion increase according to an aide.

The maneuver involves a bit of procedural gimmickry. The bill setting up the debt limit process would need 10 Republican votes in the Senate to advance, but does not itself raise the debt limit. A second bill raising the ceiling then could be passed with just Democratic votes.

Republican Support

Senator John Thune of South Dakota, the chamber’s No. 2 Republican, said that he believes there are 10 Republican votes to make it work. 

“We think that this is a perfectly appropriate way to handle this,” he said. 

This approach would tie action on the debt ceiling to stave off nearly 10% in mandatory cuts to Medicare payments under the so-called Paygo law set to go into effect on Jan. 1. The pending cuts have alarmed hospital and doctors groups that say Medicare fee-for-service payments could be reduced by $14.1 billion in 2022 unless there’s action to stop them. These cuts would also affect trade adjustment assistance, which helps workers who have lost their jobs due to trade-related circumstances, and farm price supports. Congress has previously waived the Paygo rule.

“A lot of people don’t want to cut, or be part of these cuts,” Missouri Republican Senator Roy Blunt said.

The Biden administration welcomed the agreement, which would allow Senate Democrats to continue their work on President Joe Biden’s almost $2 trillion tax and social spending plan.

“We are heartened to see the progress being made today and hope for quick consideration so we can focus on the president’s economic agenda,” White House press secretary Jen Psaki said at a briefing.

Congressional Democrats found themselves searching for a route to avoid the government defaulting on its obligations as Senate Republicans insisted that Democrats would have to deal with the debt limit on their own. Senate Democrats have resisted for months raising the debt ceiling using a multi-week budget reconciliation process. 

Treasury Secretary Janet Yellen has warned that the government could hit the debt limit and have difficulty meeting its obligations after Dec. 15, though outside analysts have said the government has a bit more time.

Congress added $480 billion to the U.S. debt ceiling in October after 11 Republicans allowed a bill making the increase to pass the Senate. McConnell at the time vowed this would be the last time Republicans came to the aid of Democrats on the debt ceiling matter.

©2021 Bloomberg L.P.