(TheStreet) - If Congress and the White House can’t agree to raise the $31.4 trillion government-debt ceiling, the government will likely default on some of its obligations. And the outlook for an accord between the Biden administration and Congress is bleak.
That’s because hardline Republican conservatives in the House vow they won’t vote to lift the debt ceiling without severe spending cuts that are unacceptable to President Joe Biden and other Democrats.
Establishment Republican executives are trying to get the uber-conservatives to listen to reason, but they haven’t had much luck.
Ralph Axel, rates strategist at Bank of America, is pessimistic about the chances of avoiding default.
“We think it is likely that by late summer or early fall, the federal government will temporarily be forced to default on a portion of its daily obligations for a time ranging between a couple of days to a few weeks,” he wrote in a commentary.
“If so, this would represent the first time in history that the U.S. would default on any of its obligations due to the debt-ceiling law.
"We think [a default] would include a fall in equity and bond prices, potentially testing Treasury market functioning and liquidity.”
The Treasury Department has begun a series of accounting moves to stave off default until June. But after that, it’s anyone’s guess. Some experts say the drop-dead date is August or September.
Investors Seem Oblivious; They Shouldn't Be.
While financial markets would bear much of the brunt of a default, investors don’t yet seem too concerned. Bond prices have soared in recent weeks, and stocks are up, too. It’s more economists and other experts who are sounding the alarm.
There has been talk of various gimmicks the government could deploy, such as having the Fed buy defaulted Treasury securities, or having it issue a $1 trillion coin.
But those moves might simply cause more chaos. Trying to prioritize government payments would likely be an absolute mess.
The last time the government had this much trouble raising the debt limit was 2011. A last-minute settlement was reached, but not before Standard & Poor’s downgraded the government’s debt rating, sending financial markets into turmoil.
Even if the government doesn't default, its credit rating may get downgraded again this year if Congress and the White House continue to struggle to reach an agreement.
What Would Default Mean for You?
So what would a default mean for you? A default could have real repercussions, ranging up to a complete nightmare for average consumers and investors.
At risk are payments to recipients of Social Security, among other obligations.
Stocks and bonds would almost certainly plunge. It’s unclear whether interest payments would be made on Treasury securities and whether maturing Treasuries would be paid out.
Withdrawing cash from your money-market account might be difficult, and the whole financial system would be at risk of freezing up.
Bank of America’s Axel does offer some words of optimism about the ultimate outcome.
“We think any decline in asset prices entering into a default would be a buying opportunity, as the debt ceiling would eventually be raised,” he said.
“And the economic damage done from operating the government in default would be minimal on an aggregate basis if it is relatively short-lived.”
When it comes to Treasury securities, “marketable Treasury debt would likely not experience any defaults at all, and this would be key to an orderly restoration of markets after the initial shock fades,” Axel said.
“The total cost of marketable debt is not only small relative to other government obligations. But it would likely be prioritized over all other payments in the Treasury payment system.”
By Dan Weil
January 19, 2023
