US DEBT CEILING PRIMER: Biden to meet with Republican leaders on Tuesday while congress is far apart from an agreement ahead of June 1st "X-Date"

Analysis details (15:01)

SUMMARY: President Biden is set to meet Republican leaders on Tuesday to discuss raising the current USD 31.4tn limit, with Congress typically tying approval of a higher debt ceiling to budget and spending measures. House Republicans have passed a bill already, but it is dead on arrival in the Senate given its spending cuts tied to the debt limit agreement, something the Democrats are highly against. The government already hit the debt-limit on January 19th, but the Treasury announced a "debt issuance suspension period", allowing it to take "extraordinary measures" to borrow additional funds without breaching the ceiling. Therefore, it has been able to continue funding government operations and avoid a default. The debt limit "X-Date", where the US special measures are expected to be reached is seen as early as June 1st, according to Treasury Secretary Yellen and the CBO. However, analysts expect this is a cautious estimate to help persuade congress to act on coming to an agreement. JPMorgan and Moody's see the real X-date occurring in August, while ABN Amro suggest it is likely to occur in late July, providing the government makes it to the mid-June tax payment deadline.

GOP VIEWS: The Republican held house passed a bill in April to raise the USD 31.4tln debt ceiling, albeit it was very much dead on arrival in the Democrat held Senate, and even if it were to pass the Senate, President Biden has said he would veto it. The Democrat opposition to the bill primarily centred around the future spending cuts and the move from Republicans was seen as a way to help bolster their stance in upcoming negotiations with Democrats and the President. 

DEM VIEWS: Senate Democratic Leader Schumer notes the Senate would only consider a bill that raises debt ceiling without addressing priorities of Republicans. Democrats say they want a clean debt limit bill and the House Dem Leader, Hakeem Jefferies, said he is very against a short-term debt ceiling deal, as they do not just want to "kick the can down the road". With issues around Republicans desire for spending cuts, the Dems want to separate the issues. NBC reports that Jefferies notes Dems are "open to discussing what types of investments, spending and revenues are “appropriate” to protect the “health, safety and economic well-being” of the American people." Note, House Democrats have filed a “special rule” that could eventually be used to “allow Floor considerations of a bipartisan measure to avoid a dangerous default.”, according to Punchbowl, although added this "won’t be in play for several weeks but is a backup plan by Dems".

WHITE HOUSE VIEWS: It was reported on Friday the White House is considering a short-term extension of the debt ceiling to allow parties to keep negotiating, according to CNBC citing sources, noting the key question is what would the GOP want in return and for how long. However, the House Democrat Leader Jefferies said over the weekend Democrats would not accept such a proposal and the White House then later agreed with him.

RISKS: The main risk is a deal not being reached and the US defaults. As a result of these risks, 1mth US Treasury Bill yields recently hit fresh record highs while ING highlighted that 5yr CDS are now at highs since the GFC, adding although it is elevated, it is far from discounting an actual default, and is just playing the mild probability of a default. ING also warned there would still be a material tarnishing of US Treasuries even if just one interest payment were missed. The desk also writes one default should not take down the system if holders are made whole through a swift resolution on the debt ceiling, but also warns things could also unravel quickly and uncontrollably, and "in essence the entire global financial system is at threat".  Analysts at JPMorgan see a less than 10% chance of a default occurring, but they do see a credit downgrade as being likely. The desk adds that there is an 80% chance a deal gets done within two weeks of the drop-dead date, JPM sees this in mid-August, while a 10% chance a deal is done in the final days, and a 10% chance a technical default occurs, but just for 3/4 days before they come to an agreement. 

POTENTIAL SOLUTIONS: The Debt ceiling issue has arisen many times before, but usually an agreement is reached, even with a split Congress. ABN Amro notes the two most likely outcomes are: 1) a last minute deal that involves some cap on spending, or 2) a suspension of the debt ceiling to allow more time for talks, potentially to as late as September 30th, the end of FY23. This would line up with the government budget authorisation, giving them a deadline of October 1st to avoid a government shutdown and increase political pressure to sort out the debt limit too. In this scenario, Moody's suggest lawmakers will go on to increase the debt limit ahead of October 1st, and boost the limit by enough to see them through to 2025 to ensure it does not get tied up with the 2024 election. 

08 May 2023 - 15:00- Fixed IncomeEconomic Commentary- Source: Newsquawk