By Tom Ozimek
The cost of insuring exposure to United States sovereign debt rose on Wednesday to its highest level since 2011 after Treasury Secretary Janet Yellen warned that failure to lift the federal borrowing cap would trigger an economic catastrophe, suggesting investors are growing more nervous about the debt ceiling deadlock in Washington.
Spreads on U.S. five-year credit default swaps widened to 62 basis points, according to data from S&P Global Market Intelligence. That’s up from a close of 59 basis points on Tuesday and more than double their level at the start of the year. It’s also the highest level since 2011, according to Refinitiv data.
The United States bumped up against its $31.4 trillion debt ceiling in January, leaving it to Congress to raise the cap and allow the government to keep paying its bills.
Democrats have insisted on legislation with no preconditions to raise the debt ceiling, while Republicans have demanded spending cuts in exchange for their support to lift the borrowing cap.
Until a debt ceiling deal is reached, the Treasury Department has resorted to so-called “extraordinary measures”—basically accounting maneuvers—that allow the government to continue making payments on its debt obligations. But at some point, these will run out.
Both Washington and Wall Street are focused on what’s known as the coming “X-date,” the moment at which Treasury will be unable to issue any more bills, bonds, or notes and can only make payments on its debt obligations from tax revenues.
While concerns about a possible U.S. sovereign debt default have been evident in bond markets for some time, stock market investors have been less fazed, with the S&P 500 rallying around 6 percent so far this year.
“The chances of U.S. default remain very, very slim,” said Guy Miller, chief market strategist at Zurich Insurance Group. “However, it just takes the probabilities to rise above zero and it becomes a real issue from an investor perspective.”
Still, the price action on U.S. five-year credit default swaps suggests investors are growing more jittery and trying to hedge against the prospect that negotiations around lifting the debt cap could come down to the wire—or fall through entirely.
Yellen on Tuesday warned that failure by Congress to raise the government’s debt ceiling—and the resulting default—would trigger an “economic and financial catastrophe” that would decimate jobs and make borrowing money more expensive for years to come.
She said it was a “basic responsibility” of Congress to raise or abolish the $31.4 trillion borrowing cap, warning that a default on the country’s debt would raise the cost of borrowing “into perpetuity” and that “future investments would become substantially more costly.”
In the event of a default, American businesses would face deteriorating credit markets while the government would probably be unable to issue payments to military families and seniors who rely on Social Security, she warned.
“This economic catastrophe is preventable,” Yellen continued. “Congress must vote to raise or suspend the debt limit. It should do so without conditions. And it should not wait until the last minute.”
President Joe Biden has, in similar terms as Yellen, insisted on an unconditional lift of the debt cap.
“America is not a deadbeat nation,” Biden said at an event in Washington on Tuesday. “We pay our bills.”
Republicans have been seeking to tie spending cuts to their support for raising the borrowing limit.
As a basis for negotiations, House Republicans last week introduced legislation to raise the debt ceiling by $1.5 trillion while laying out a series of spending cuts amounting to roughly $4.5 trillion.
House Speaker Kevin McCarthy (R-Calif.) has been working to shore up support for the GOP proposal, called the Limit, Save, Grow Act of 2023.
McCarthy has hoped that passage of the Republican plan would drive Biden to the negotiating table, something that the president has refused to do.
“Remember what this bill is. This bill is to get us to the negotiating table. It’s not the final provisions,” McCarthy told reporters on Tuesday on Capitol Hill.
The Republicans’ 320-page bill calls for returning discretionary spending to 2022 levels, capping spending growth to 1 percent per year, and repealing certain tax credits.
Biden has expressed opposition to the GOP proposal and insisted on a clean bill with no preconditions on raising the debt cap.
Biden Threatens Veto
The House could vote on the GOP bill as early as Wednesday, though it’s unclear if it has enough support from Republicans to pass.
Several Republicans have expressed opposition to the bill, with some saying it doesn’t cut spending deeply enough while others worry about the impact on their constituents.
McCarthy can only afford to lose four votes from the Republicans’ slim 222–213 majority for the measure to clear the House.
The White House on Tuesday voiced its opposition to the GOP measure. In a Statement of Administration Policy (pdf) the White House called the Republican bill “a reckless attempt to extract extreme concessions as a condition for the United States simply paying the bills it has already incurred.”
“This legislation would not only risk default, recession, widespread job loss, and years of higher interest rates, but also make devastating cuts to programs that hard-working Americans and the middle-class count on,” the statement continued.
“Therefore, if the President were presented with the Limit, Save, Grow Act of 2023, he would veto it,” it added.
GOP Debt-Ceiling Plan
Besides decreasing Congress-approved annual spending to $1.47 trillion and capping spending growth at 1 percent annually over the next 10 years, the Republican plan features a series of other measures, including canceling Biden’s student loan forgiveness program.
The plan would also take back unspent COVID-19 relief funds, remove barriers to increased domestic energy production, and reimpose work requirements for many people collecting welfare.
It would also cancel the remaining money from the $5.2 trillion in COVID-19 relief programs Congress approved between 2020 and 2022. According to the White House, less than $80 billion of this remained unspent in January, with most of the money earmarked for union pension funds, veterans’ health care, and medical research.
Biden’s efforts to cancel around $400 billion in student debt are also on the chopping block. Republicans have argued that the student debt wipeout is unfair to those who didn’t rack up loans to go to college or who sacrificed to pay off their debts.
The plan would also repeal incentives for renewable energy, electric vehicles, and other supposedly green technologies that Democrats passed last year as part of the Inflation Reduction Act.
The proposal would also give Congress more power to review new rules put forward by the executive branch, potentially giving Republicans more power to block regulations they consider detrimental.
The package includes a fossil-fuel bill aimed at promoting energy development on federal lands, reducing regulations, and eliminating Democratic-backed climate incentives.
“If Washington wants to spend more, it will have to come together and find savings elsewhere, just like every household in America,” McCarthy said on the House floor last week.
“President Biden has a choice. Come to the table and stop playing partisan political games, or cover his ears, refuse to negotiate, and risk bumbling his way into the first default in our nation’s history,” McCarthy added.
Democrats have argued the Republican plan would bring an estimated 22 percent reduction in many social support programs.
“Default would be totally irresponsible,” Biden said Tuesday. “It would mean cuts in Social Security and Medicare, higher interest rates for your credit cards, car loans, mortgages.”
“The entire economy would be put at risk.”