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🪙 Debt ceiling drama

published20 days ago
4 min read

​Debt ceiling drama​

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In this issue

  • Make a forecast: Will debt ceiling brinkmanship ding the US credit rating?

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Another year, another pointless, dangerous debt ceiling fight. Will the 2023 edition be the one that blows up in our faces?

Sometime later this year—this summer or fall—the US will need to raise or suspend the debt ceiling so as to continue to fund the spending that Congress has already committed to. In order to secure the House speakership, Kevin McCarthy reportedly has agreed that his party will not raise the debt ceiling without some sort of spending cuts attached.

On Thursday, McCarthy acted as if this were no big deal, telling reporters he’d talked to Biden and was looking forward to sitting down and “work[ing] through these challenges.” He drew a comparison to the 2019 spending deal, during the Trump administration, which suspended the debt ceiling for two years but which raised spending.

The worry is that this year will be more like 2011, when debt ceiling brinkmanship by Republicans panicked the stock market and led Standard and Poor’s to downgrade the US credit rating.

There are forecasts kicking around of whether the US will raise or suspend the debt ceiling this year—more on them shortly—but those don’t entirely capture the worry. In 2011, the debt ceiling did eventually get raised. But there were still repercussions for markets and for America’s reputation.

So this week’s forecast is about America’s credit rating, which could be dinged if the debt ceiling fight gets dicey:

  • Will Fitch, Moody's, and/or S&P downgrade their long-term credit ratings or outlooks for the United States in 2023? (Make a forecast at the bottom of this email.)

Background

The debt ceiling sets a legal limit on the federal government’s outstanding debt. It’s separate from spending, though, which Congress manages through appropriations bills. The debt ceiling needs to be raised regularly to keep up with new spending and has been raised or suspended 20 times since 2002.

In 2011, Republicans used the threat of not raising the debt ceiling to negotiate spending cuts. A deal eventually passed but the standoff rattled markets and consumer confidence. S&P downgraded the US credit rating in the aftermath, from AAA to AA+. (Moody’s and Fitch made no change.)

If the US defaulted on some of its debt because of a debt ceiling breach, the cost of US borrowing would likely rise and the breach could trigger a financial crisis.

How does this end? The Treasury will keep paying debts as long as it can through “extraordinary measures” but eventually either Congress raises, suspends, or abolishes the debt ceiling, or there is a debt ceiling breach. That is, unless the Treasury department gets weird and decides to avoid default by minting a $1 trillion coin, an #EconTwitter favorite—essentially exploiting a loophole to print money instead of issuing new debt.

Indicators

How likely is it that the debt ceiling gets raised?

​The current credit ratings and outlooks for the US​

Perspectives

Will they or won’t they?

It seems unlikely that next year’s debt limit deadline will create quite as much uncertainty as the 2011 experience, but there is a good chance it will come closer than at any point since then. —Goldman Sachs, Dec. 2022​
While many Republicans still talk a big game about fiscal responsibility, the politics of the issue have shifted dramatically… don’t expect a repeat of the dramatic showdowns we saw 12 years ago. A prolonged government shutdown—to say nothing of another debt ceiling crisis—wouldn’t play to Republicans’ advantage, and Republican leaders know it. —Tim Lee, Full Stack Economics​
Libby Cantrill, PIMCO's head of public policy, said she believes that if "push-comes-to-shove" enough votes could be rounded up for a debt ceiling increase with a combination of Democrats and some moderate Republicans. —Reuters, Jan. 2023​

What might drive a credit rating downgrade

“Governance is a weakness [for the US] relative to the 'AAA' median, and the future direction of the rating is sensitive to the direction it takes. The failure of the former president to concede the election and the events surrounding the certification of the results of the presidential election in Congress in January 2021, have no recent parallels in other very highly rated sovereigns.” —Fitch Ratings, July 2022​

How credit “outlooks” work

“When one of the three major credit-rating agencies places a company on negative watch, it indicates that the agency has noted a circumstance or circumstances that might cause it to downgrade the company's credit rating in the near future.” —Investopedia​

Forecast

Will Fitch, Moody's, and/or S&P downgrade their long-term credit ratings or outlooks for the United States in 2023?

​~10% chance​ ​​​​​

​​​​~30% chance​ ​​​​​

​​​​~50% chance​ ​​​​

​​​​​~70% chance​ ​​​​​

​​​​~90% chance​​​​​

The fine print

  • Just want to make a quick forecast? Click a link above and you're done! Your forecast will be recorded.
  • Or, click a link and finish the survey. You can make your forecast more precise and guess what other readers will say.
  • Deadline: Make a forecast by 9am ET Jan. 17.
  • Resolution: The outcome will be determined using data as reported by Trading Economics. A downgrade to the outlook or a negative watch would count.
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