​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?

• ​Kalshi, the real-money prediction market, gives an 87% chance of the debt ceiling being raised or suspended by the end of 2023​
• ​Matt Yglesias gives a 90% chance of a statutory debt ceiling raise​
• Good Judgment Open just launched two questions on this: Will the ceiling be raised? and Will one of the agencies downgrade the US rating or outlook?​

​The current credit ratings and outlooks for the US​

Perspectives

Will they or won’t they?

What might drive a credit rating downgrade

How credit “outlooks” work

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.