sigh. On the one hand, sadly, it was predictable that we would end up here.On the other hand, we are very annoyed still Discuss whether the US will raise the debt ceiling and what the consequences will be if it does not.
Regardless, Pimco has been blunt in saying it still has “high belief” will be canceled before the U.S. Treasury runs out of dough at the end of the month.
It might be redundant to say this, but Pimco clearly has a sizable vested interest in this coming to an end saga, so this may just be hope masquerading as analysis. Still, Pimco’s Libby Cantrill described why in a vivid way.
After all, while neither side appears to have any political incentive to back down before absolutely necessary, neither does either side have any political incentive to breach the contract. To use an apt but graphic analogy: passing the debt ceiling is like passing a kidney stone – we know it will pass, it’s just a matter of how painful it will be. We can assert that we are now in a period of pain.
Of course, the formation and passing of kidney stones is not something you have too many options for. It’s more like America’s political establishment (yes, overwhelmingly Republicans) repeatedly banging their heads against a brick wall because they think it’s working well for the base.
Regardless, Cantrell contends that the basic outlines of the deal have been known for some time. She outlines them in the list below, which we’ve reformatted but left unchanged:
— Reclaim unspent COVID-19 funds
— Restricting “discretionary” spending (roughly 25% of the U.S. government’s $6 trillion annual budget)
– job requirements for specific entitlements (polls are nice, but tend to be cumbersome to manage, so have little effect from a deficit perspective)
– and possibly some down payment for energy licensing reform (traditional and clean energy).
There may also be some minor changes to the Medicare reimbursement process for hospital treatments, she added. Bigger sticking points include baseline spending in 2024 and a long-term discretionary spending cap, but Cantril doesn’t think much will change on that front.
Here’s how she sees the process, and here are Pimco’s highlights:
comprehensive, We believe policymakers will find common ground, which could lead to few, if any, near-term spending cuts But relative to the CBO’s current projections, that would generate longer-term deficit savings. Of course, to truly address the country’s fiscal sustainability, policymakers must address the elephant in the room — entitlement spending — but that’s going to be politically bipartisan for the foreseeable future. impossible.
In fact, when do lawmakers need to reach an agreement? Everyone is working towards the June 1 X date for the Treasury Department.In order to meet the deadline, negotiators may need to this week To draft legislative texts, followed by House and Senate proceedings. Once an agreement is reached in principle, there may be more drama around building enough support for the deal among rank-and-file members, but we believe there will be enough support on both sides of the aisle to pass the bill. Also, if Congress needs more time to negotiate or implement, we could see a short delay of up to a week or two.
We don’t want to invoke the 14th Amendment. More recently, talk has grown that President Joe Biden could use the 14th Amendment to effectively ignore the debt ceiling, citing the “non-challengeable” clause of public debt. However, Treasury Secretary Janet Yellen continues to insist that the only way to address the debt ceiling is through Congress. From a market perspective, a correction approach seems unlikely given the uncertainty it could cause, and from a political perspective, given the expected rebound.
Market Reaction: If the past debt ceiling situation is prologue, stocks could be volatile this week depending on how the talks progress, but assuming the expected deal materializes and there is no default, the market could retreat after the resolution. (The exception was 2011, when stocks continued to fall after the resolution and date X, partly because of the European debt crisis and partly because of expectations of big spending cuts in the resolution.) Having said that, we have seen major disruptions in fixed income markets , which presents both risks and opportunities – see our recent View, “The Debt Ceiling Debate: Examining Risk Around X Date.“
Bottom line: While the next few days and weeks may be noisy, we remain constructive on an agreement reached by June 1, with the possibility of a short-term extension (in weeks, not months). So, after the much-anticipated 2024 election, it may take until 2025 for lawmakers (and markets) to fight the debt ceiling again. Until the last minute, no one seemed to have the political motivation to compromise, so we may see some pain and drama leading up to next week’s deadline, but the overall outcome seems clear to us: the debt ceiling resolution will pass.
These opinions are as of Tuesday morning, May 23, 2023.
This is always interesting when you need to specify not only the forecast date, but also the time of day. What a shit show.