Economists warned of the dangers of the ongoing debt limit standoff at a Senate hearing Thursday highlighting what Democrats say would be the painful outcome if a recently passed Republican House debt limit and spending bill becomes law.
Meanwhile, Moody’s Investors Service released a report Thursday outlining the impact on various credits of different debt limit scenarios ranging from a last-minute agreement to a default. Low-rated credits would feel the heat from market volatility even if a deal is reached while the “vast majority” of state and local governments would be resilient, the agency said.
The U.S. officially hit its $31.4 trillion debt ceiling limit on Jan. 19, prompting Treasury to take temporary measures to free up room. On Tuesday, Treasury suspended the sale of State and Local Government Series securities in the latest extraordinary measure to avoid default.
Treasury Secretary Janet Yellen warned Monday that the U.S. could run out of money despite the extraordinary measures as soon as June 1 amid lower-than-expected tax collections.
The White House and Senate Democrats want to pass a “clean” debt limit bill while Republicans want to pair it with spending cuts and provisions like clawing back pandemic funds. President Biden has invited House Speaker Kevin McCarthy, R-Calif., and other Congressional leaders to meet at the White House Tuesday.
The debt limit debate comes at “an especially inopportune time,” Moody’s Analytics chief economist Mark Zandi told the Senate Budget Committee Tuesday, calling the economy heading into 2024 “very, very fragile.”
“We need to end this drama as quickly as possible,” said Zandi, who said the country would likely run out of money by June 8. “If we don’t, we’re going to go into recession and our fiscal challenges will be made even worse.”
The House Republican bill, which Senate Democrats have dubbed the “Default on America Act,” carries little chance of becoming law, but Thursday’s committee hearing marked the first of several the Senate plans to hold to highlight the damage it would do, said Senate Majority Leader Chuck Schumer, D-N.Y.
Zandi, while warning of the impact of the bill’s large spending cuts, agreed with Sen. Mitt Romney, R-Utah, who said that the country needs to deal with the deficit.
“It’s very clear that we’re on an unsustainable path fiscally,” Zandi agreed. “We need to address this…but it can’t be done in the context of the debt-limit debate. We are increasingly coming to the edge of defaulting and we will default if we continue down this political path.”
Moody’s Investors Service, in its report, said its baseline expectation is that lawmakers will ultimately raise or suspend the debt limit before the X-date.
“But the uncertainty itself is raising credit risks,” Moody’s said.
A range of public finance credits would be affected by a move to prioritize interest payments and/or a default, the ratings agency said. But, even if the U.S. credit rating is cut a notch, the “vast majority of states and local governments would be resilient,” Moody’s said.
“States themselves are sovereign and have broad fiscal autonomy and ability to increase tax revenue, decrease expenditures, and manage their debt obligations,” analysts said. “Local governments also have very stable revenue bases. High available resources could also mitigate a government’s exposure to the sovereign.”