As Possible Debt Limit Crisis Nears, Wall Street Shrugs

WASHINGTON — Speaker Kevin McCarthy chose the New York Stock Exchange on Monday to deliver his most detailed comments yet on House Republicans’ demands for raising the nation’s borrowing limit. But his comments made little impression on Wall Street, where investors continue to trade stocks and Treasury bonds under the assumption that Congress and President Biden will find a way to avoid a calamitous government default.

The lack of a market panic about the talks reflects a been-there, done-that attitude that investors have increasingly taken to partisan showdowns over taxes, spending and the government’s ability to pay its bills on time, which lawmakers often resolve at the last possible moment.

But there are reasons to believe that this time could play out differently, starting with the chaos in Mr. McCarthy’s caucus — and new warnings that lawmakers might have less time to raise the $31.4 trillion limit than previously thought.

The next few weeks will more precisely determine how quickly the government will exhaust its ability to pay bondholders, employees, Social Security recipients and everyone else it sends money to on a regular basis. That’s because data on the government’s tax receipts for the year will come into sharper focus after Tuesday’s deadline for people to file individual income tax returns for 2022.

On Tuesday, Goldman Sachs economists sounded a warning that the potential default date could be much sooner than previous forecasts — which typically pegged the date in July or August — if revenue comes in soft. “While the data are still very preliminary, weak tax collections so far in April suggest an increased probability that the debt limit deadline will be reached in the first half of June,” they wrote.

Understand the U.S. Debt Ceiling

What is the debt ceiling? The debt ceiling, also called the debt limit, is a cap on the total amount of money that the federal government is authorized to borrow via U.S. Treasury securities, such as bills and savings bonds, to fulfill its financial obligations. Because the United States runs budget deficits, it must borrow huge sums of money to pay its bills.

The limit has been hit. What now? America hit its technical debt limit on Jan. 19. The Treasury Department will now begin using “extraordinary measures” to continue paying the government’s obligations. These measures are essentially fiscal accounting tools that curb certain government investments so that the bills continue to be paid. Those options could be exhausted by June.

What is at stake? Once the government exhausts its extraordinary measures and runs out of cash, it would be unable to issue new debt and pay its bills. The government could wind up defaulting on its debt if it is unable to make required payments to its bondholders. Such a scenario would be economically devastating and could plunge the globe into a financial crisis.

Can the government do anything to forestall disaster? There is no official playbook for what Washington can do. But options do exist. The Treasury could try to prioritize payments, such as paying bondholders first. If the United States does default on its debt, which would rattle the markets, the Federal Reserve could theoretically step in to buy some of those Treasury bonds.

Why is there a limit on U.S. borrowing? According to the Constitution, Congress must authorize borrowing. The debt limit was instituted in the early 20th century so that the Treasury would not need to ask for permission each time it had to issue debt to pay bills.

Republicans are refusing to raise the borrowing cap unless Mr. Biden agrees to reduce government spending and slow the growth of the national debt, a position that risks plunging the United States into recession if the Treasury Department runs out of money to pay all its bills on time. But Mr. McCarthy has struggled to unite his Republicans around specific cuts, even though he said Monday that he will put such a plan on the House floor next week.

Moderates in the Republican caucus are wary of deep cuts to popular domestic programs, like education and National Parks, that would be spurred by his proposal to cap domestic spending growth at a level well below the current inflation rate. Fiscal hawks, including a faction that resisted Mr. McCarthy’s appointment as speaker and could effectively force a vote to oust him at any time, have pushed for far more aggressive reductions. They include lawmakers who have never voted to raise or suspend the debt limit, even under former President Donald J. Trump, who signed three suspensions of the limit into law.

Mr. McCarthy detailed his plan to fellow Republicans on Tuesday. As outlined on Monday, it would raise the limit for about a year. It would also return most domestic spending to fiscal year 2022 levels and cap its growth over a decade. Mr. McCarthy also wants to add work requirements for recipients of federal food assistance and reduce federal regulations on fossil fuel development and other projects, which he says will increase economic growth.

It is unclear if enough Republicans would vote for that package to ensure its passage in the House. Senate Democrats would almost certainly reject it, as would Mr. Biden, who has said repeatedly he expects Congress to raise the borrowing limit with no strings attached.

Mr. Biden has shown no indication that he will intervene to speed up discussions over raising the limit, or seek to broker any deals in Congress to do so. The president has said he will negotiate taxes and spending levels separately from the borrowing limit. But he and his aides are refusing to engage further with Mr. McCarthy on fiscal policy until Republicans rally around a budget plan.

“It’s very hard to say we have something that we know is going to be a proposal” from Republicans on spending cuts, Lael Brainard, the director of Mr. Biden’s National Economic Council, said at the media outlet Semafor’s World Economy Summit in Washington last week. “But we look forward to that.”

The only market thus far to reflect stress about the debt limit is the one most attuned to it: Credit default swaps, which price the risk of the government failing to make scheduled payments to bondholders. Mr. McCarthy shrugged off that stress in a question-and-answer session after his speech on Monday.

“Markets go up and down,” he said.

Stock and bond markets were unfazed after Mr. McCarthy’s comments. They have in recent months been far more reactive to any evidence about what the Federal Reserve will do next in its campaign to tame high inflation by raising interest rates.

More on the Debt Limit

Some White House officials privately say they expect Republicans to step up their efforts to raise the limit if and when investors begin to worry more about negotiations. That’s what happened in 2011, when a showdown between congressional Republicans and former President Barack Obama nearly ended in default. Stocks plunged and borrowing costs rose for corporations and home buyers. The damage took months to repair.

Some Republicans are similarly hopeful that a wake-up on Wall Street will push Mr. Biden to change his negotiating stance, including Representative Patrick McHenry, Republican of North Carolina and chairman of the House Financial Services Committee.

“I don’t think market participants have any idea of how bad off these negotiations are right now, which should give them pause and concern, and actually should bring the president to the table,” he said.

Appearing before Mr. McHenry’s committee on Tuesday, the chairman of the Securities and Exchange Commission, Gary Gensler, warned that a default on U.S. debt “would be one heck of a mess in capital markets.”

“It would hurt the equity markets, it would hurt the rest of the fixed income markets, and it would ripple into the banking system,” he said.

Catie Edmondson contributed reporting.

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