Wall Street banks, including JPMorgan and Goldman Sachs, are warning that Washington is heading for the riskiest debt ceiling showdown since 2011, when the United States lost its risk-free credit rating.
The debt ceiling fight could be the biggest issue facing the U.S. economy in 2023, according to a JPMorgan note to clients on Friday.
Congress has had many wrangles over lifting its borrowing limit in recent years and has never defaulted on its debt. But given the particularly turbulent state of the legislature, a deal to keep the world’s biggest economy from defaulting on its debt could be harder to come by this time around, JPMorgan’s chief U.S. economist Michael Feroli said. .
The implications of a default were difficult to predict, Feroli added, but could conceivably result in a “severe recession”.
“Even the best-case scenario will likely see the kind of crisis that happened in the debt ceiling crisis of 2011,” he said.
The US Treasuries market is the foundation of the global financial system and a haven for central banks and investors around the world. A default would in all likelihood have cascading effects across multiple asset classes and geographies.
Last week, the government began taking “extraordinary measures” to meet its obligations after the country hit its borrowing limit of $31.4 billion. The Republican majority in the House of Representatives demanded deep budget cuts in exchange for raising the debt ceiling. The White House and the Democratic majority in the Senate say that is not an option.
Over the past few decades, the debt ceiling has regularly turned into a partisan battle in Washington when the government is divided. But some experts believe the looming showdown will be particularly difficult to resolve because Republican House Speaker Kevin McCarthy won the election in part by promising to play tough with the Democrats.
McCarthy was elected after 15 ballots after a hardline minority refused to back his presidency, suggesting a fractured Republican caucus that may not want to vote for a deal even if a compromise is reached.
“We have the most risk of debt limit problems since 2011,” said Alec Phillips, chief political economist at Goldman Sachs, adding that this time around the United States has more debt and lower interest rates. higher interest.
Pablo Villanueva, senior U.S. economist at UBS, said “this is a bit of a different debt ceiling episode” as the Fed is engaged in quantitative tightening and is “very quickly” pulling cash out of the market. economy after years of monetary stimulus.
“That’s why I think the debt ceiling is particularly important this time around,” he added.
So far, U.S. government and corporate bonds have started the year on a positive note, supported by signs of slowing inflation and hopes that the Fed will soften its stated intention to continue raising interest rates. interest rate.
However, some market participants are warning that investors are disregarding the high-stakes showdown, with many anticipating that Congress will capitulate.
“In the past, Congress has acted before the ‘X’ date,” Villanueva said. “So I think the market is assigning a very high probability that Congress will act again.”
Meghan Graper, global co-head of the Investment Grade syndicate at Barclays, said: “The debt ceiling is not impacting our market at this time. But I expect any involvement to be a second-half phenomenon.
Maureen O’Connor, Global Head of High Quality Debt Syndicate at Wells Fargo, said: “This year’s debt ceiling is a bit different from some of the debt ceiling dramas we’ve been dealing with these last two years.
“When talking about Black Swan events, this is one,” she added.