[REPOST] PRIMER: President Biden and House Speaker McCarthy have struck a deal over the debt-ceiling

Analysis details (06:41)

• The agreement would avert a US default, suspend the debt ceiling until 1st January 2025, cap federal spending for the next two years, claw back unused COVID funds, hasten the permitting process for some energy projects, and include extra work requirements for food aid programmes.


• The plan now faces a push through Congress, where it will likely face objections from both sides of the aisle. Lobbying is already underway to secure votes; Biden staff have already contacted many Democrats, McCarthy expects the majority of Republicans in the House will vote for the bill, while Republican Senate Leader Mitch McConnell has also backed the deal.


• Secretary Yellen suggested it is likely that the Treasury would have enough funds to make around USD 130bln of payments due Thursday and Friday, but said that the US will run out of money to cover its obligations on time by 5th June, and subsequently the Treasury could begin missing payments, though it is unclear which ones.


• Analysts at Goldman Sachs said that “reaching a deal between leaders had been the highest hurdle and this agreement eliminates most of the uncertainty regarding the impending debt limit deadline, though the legislation must still pass the House and Senate,” Goldman Sachs said, noting that the House is slated to vote Wednesday (May 31st) while the Senate could vote by Friday (June 2nd), though it would not be surprising to see procedural delays push the vote into the weekend. “Regardless, the chances that Congress allows the June 5th deadline to pass without action now appear very low, GS said, adding that the deal itself is expected to trim GDP spending by 0.1-0.2% annually in 2024 and 2025, but FY23's funding boost may keep overall discretionary spending slightly higher next year.


• Analysts at Capital Economics said “there’s still some uncertainty over whether the bill will pass both houses at first attempt, but if it doesn’t, we suspect that a more alarmed reaction in financial markets will quickly focus minds in Congress and it will pass shortly after that.” adding that “given the timing, it might take until next weekend to get the debt ceiling raised, but that would still be ahead of the 5th June X Date.”


• CRA Moody’s has previously said that missing the X-date would see them reassess US ratings, but so long as interest and principal on bonds was being paid, a default may be avoided.

30 May 2023 - 06:41- Fixed IncomeEconomic Commentary- Source: Newsquawk