24 May 2023 US debt ceiling negotiations continue to stall ahead of deadline

US debt ceiling negotiations continue to stall ahead of deadline​

What do you need to know this week?

Creeping closer into view with each passing day for several weeks now has been the deadline to raise the US Federal Government’s “debt ceiling”. This refers to the limit Congress places on the ability of the US Federal Government to borrow money, with the Federal Government expected to hit the ceiling on 1 June.

Until President Bill Clinton’s administration (1992-2000), Congress had increased the debt ceiling as a matter of procedure to accommodate the Federal Government’s steady growth since the debt ceiling was introduced in 1917. It did not become a political issue until 1995, when the House of Representatives — controlled then as it is now by the Republican Party — refused to raise the debt ceiling in an attempt to thwart the then-Democrat President, Bill Clinton.

Similar tactics were used twice under President Obama’s administration, and now again are in play against President Biden. This week, President Biden and Speaker of the House Kevin McCarthy, who leads the Republicans in the House of Representatives, have been attempting to reach a compromise. McCarthy is demanding that Biden agree to deep cuts and eligibility reforms to the already meagre US social safety net programmes in exchange for raising the debt ceiling.

Complicating the matter is that McCarthy won his contested bid for Speaker of the House last January by vowing to work with the far-right fringe members of the Republican Party, many of whom are now demanding extreme ultimatums from the Democrats in consideration for increasing the borrowing limit.

Why is this important for your interviews?

This is, in the first instance, a political issue, and therefore not usually something worth discussing in interviews. However, the consequences for the global economy if the debt ceiling is not raised would be unprecedented and quite likely to cause market chaos.

For one, unable to borrow more money, the US Treasury will default on the outstanding interest payments it owes on the trillions of dollars of US treasury bonds (“T-bills”) in circulation, which form the bedrock of the modern financial system worldwide. This is because T-bills are widely seen as the safest form of debt compared to any other, including the debt of other countries like the UK.

A default would greatly disrupt market confidence in the value of T-bills because investors, which rely on the certainty of the T-bill interest payments, would presumably try to offload their T-bill positions. This would send the price of T-bills plummeting, something that has never happened before. In turn, the wider debt markets would be rocked with uncertainty because the value of other debt instruments like corporate bonds is largely determined in relation to the price of T-bills.

No doubt, McCarthy is aware of the consequences, which is why the debt ceiling makes for a powerful negotiation tool for the House of Representatives. But even if default is averted, each day we lurch closer to the deadline means increasing market uncertainty, which is already starting to pose problems for the stock markets.