As I write this piece, sitting at my desk in the UK on the morning of Friday 26 May, there are rumours that a deal is close between President Joe Biden and congressional Republican Kevin McCarthy that would prevent the US federal government from hitting its debt ceiling and potentially defaulting as early as next week. Today’s problem may have been resolved (or, more accurately, kicked a couple of years down the road) before you get to read this. Or it may not. This lingering state of uncertainty is the problem with brinkmanship. Why agree to anything until the very last minute, when you may get a better deal by waiting? The fact that the market-implied probability of a default by the US government, whose liabilities in normal times are viewed as the benchmark risk-free asset, has hit 3% in recent days, is remarkable and troubling in equal measure. As our chart shows, whenever a Democrat president has not been in control of both Houses of Congress, as was the case for much of Barack Obama’s 2009 – 2017 presidency, the debt ceiling issue has reared its head approximately every two years, sparking (usually modest) fears of default. Estimates by the US Federal Reserve put together in 2013 suggest that were a standoff to last for a matter of weeks, however, it could see US equities fall by 30%, and knock one to two percentage points off annual GDP growth. Clearly there is the potential for substantial, and unnecessary, economic damage. Rather than kick the can down the road for another couple of years, it would be nice to think that next week we might see the first steps toward putting in place a framework to prevent these biannual shenanigans. Unfortunately, that seems too much to hope for.
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The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.
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