Unrelenting Political Brinkmanship Edges U.S. Closer to Default
(Bloomberg) -- Democrats and Republicans must decide in the next day or two how far to take their deadlock over the U.S. debt limit, which is pushing the country perilously close to a catastrophic default.
Wall Street strategists are taking notice of the political turmoil, warning there is growing danger for financial markets as the clock ticks closer to Oct. 18, the date by which Treasury Secretary Janet Yellen expects the country to reach its limit on sovereign debt.
A debt ceiling breach is getting “a little too close for comfort,” TD Securities strategists Priya Misra and Gennadiy Goldberg wrote in a note to clients Tuesday.
Senate Majority Leader Chuck Schumer will force a vote Wednesday -- his third try in nine days -- on whether to take up a measure suspending the nation’s debt ceiling until December 2022. Republicans, as they did the last two times, promise to block him.
“We’re not voting in any way to help raise the debt ceiling,” said Senator Mitt Romney of Utah, a Republican who sometimes works with Democrats. “As a group we are all together.”
President Joe Biden will meantime hold a White House confab with financial and corporate leaders to highlight the dangers of a looming default. The White House Council of Economic Advisers warned that, in such an event, not only would an economic crisis ensue, but fiscal policy makers would be hobbled in responding -- unlike the way they backstopped American families during the pandemic.
“The federal government could only stand back, helpless to address the economic maelstrom,” Cecilia Rouse, the head of the CEA, and other council members wrote.
Schumer on Tuesday again rejected using a time-consuming legislative approach, called reconciliation, that would allow Democrats to raise the debt ceiling without Republican support.
“Reconciliation is a convoluted and risky process, with default and downgrade hovering over us,” Schumer said.
Traditionally, suspending or raising the debt ceiling has received, bipartisan support. This time, Schumer argued, Republicans should at least “get out of the damn way” and not filibuster Democrats’ efforts.
Republicans, however, have not been swayed and Democrats might soon lose altogether the option of reconciliation, if they haven’t already.
“I do not think it is possible on a timeline that would not jeopardize the full faith and credit of the United States,” Senator Mark Warner, a Virginia Democrat, said Tuesday.
A GOP aide said Democrats still have time for reconciliation, which two former Republican budget officials said could be accomplished in about two weeks, but they would have to kick start the process Wednesday or Thursday.
Reconciliation, Senate Minority Leader Mitch McConnell has said, is the only option because Republicans will not agree to raise the debt as Democrats negotiate Biden’s costly tax and spending plan.
“They’ve had plenty of time to execute the debt ceiling increase and have chosen not to do it,” McConnell told reporters after a closed-door meeting of Senate Republicans. McConnell insisted there was still time.
Biden said Tuesday evening that a “real possibility” is for Democrats to temporarily and unilaterally change Senate rules to head off a Republican filibuster and pass a debt suspension with Democratic votes. Senator Joe Manchin, a West Virginia Democrat, however, has opposed altering the filibuster rule and Schumer when asked about it simply said he’s focused on tomorrow’s vote and that it’s the best way to resolve the matter.
On Wednesday, the president will lead a meeting of chief executive officers and other business people “on the need to immediately address the debt limit and the damaging consequences for American families, small businesses, and the economy if unnecessary delay continues any further,” The White House said on Tuesday night.
Financial markets, however, could soon feel the consequences of the looming default.
The brinkmanship could spark a stock sell off, as occurred during a 2011 debt-limit impasse that led S&P Global Ratings to downgrade U.S. debt, even though the U.S. never defaulted.
“The risk this debt-ceiling showdown roils markets like it did in 2011 is underappreciated,” Wells Fargo strategists Zachary Griffiths and Erik Nelson told their clients. The stock market’s benchmark S&P 500 plunged about 15% during that earlier imbroglio, though the slide was likely exacerbated by worries over the ongoing European sovereign debt crisis, the Wells Fargo analysts wrote.
Investors in Treasury debt maturing around the potential default date are already demanding compensation for the risk in the form of higher bill yields. Longer-dated bills normally pay higher rates than shorter ones, but mid-October and early November maturities now have higher yields than ones maturing later.
Deirdre Dunn, managing director and co-head of global rates at Citigroup said on a Brookings Institution panel Tuesday that the bank has seen recent dislocations for Treasury bills maturing in the window by as much as 20 to 25 basis points.
“I would expect increasing skittishness each day that goes by without resolution or at a minimum, meaningful change in tone” Dunn said.
GOP United Front
Much of the recent increase in federal debt -- which was suspended for two years during the Trump administration -- occurred when Republicans controlled the White House and Congress.
Nonetheless, Republican leaders predict a united vote that will block Schumer from advancing House-passed debt ceiling legislation on Wednesday.
Senator Lisa Murkowski, an Alaska Republican, said she was wavering and wants to help find a way to defuse the situation.
“We just have to ensure that we don’t even come close” to default, she said.
Still, Republicans weren’t talking alternatives on Tuesday, beyond perhaps an agreement to shorten the time it would take to hike the debt limit using reconciliation, which would include two rounds of unlimited amendments on the Senate floor.
One idea could involve agreeing in advance on a short list of amendments or even allowing senators to leave town while the clock ticks down, said one GOP aide. The Senate is scheduled to take a week-long break next week.
“On the question of timing, timing can always be discussed,” GOP Senator Ted Cruz of Texas said. “But the debt ceiling vote is going to be on reconciliation with only Democrats.”
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