Debt Ceiling Crisis Averted—for Now

The last-minute deal to raise the debt limit averted a U.S. default, but it risks making brinkmanship over federal borrowing a seasonal event as lawmakers wage fiscal war in Washington. The agreement now awaits President Joe Biden’s signature just before a June 5 default deadline, capping weeks of bitter negotiations that strained Treasury markets.

It will cost taxpayers as investors absorb a new normal.

The United States has had an extraordinary ability to borrow at low cost because global financial markets treat Treasury securities as the benchmark for risk-free debt. Yet at points in May, in the heat of the negotiations, investors demanded yields surpassing 7 percent on Treasury bills maturing around the projected default date, treating them as similar to junk debt.

The idea that repayment of U.S. Treasury debt would be a major battleground in the clash between political parties was jarring the first time Congress neared the fiscal cliff, when Tea Party Republicans employed the strategy in 2011. The newly empowered GOP House majority of that time made holding up a debt limit increase the focal point of their campaign to wring broad fiscal changes from President Barack Obama. A deal was struck no more than 48 hours before the default date. And even though the United States didn’t miss a payment, the drama prompted a downgrade in the nation’s credit rating and a stock market slide.

Once again this year, the threat of default has been the instrument that a newly empowered opposition party used to assert authority in a divided government. Regardless of whether conservatives believe House Speaker Kevin McCarthy didn’t deliver enough on their priorities, the threat was effective in forcing concessions from Biden. The default crisis works.

The willingness to take the nation to the financial cliff reflects a broader shattering of governing norms as the United States becomes ever more polarized. Compared with protesters storming the U.S. Capitol because their candidate lost an election, a potential missed debt payment doesn’t seem all that bad to most voters. And it flows from the Republican Party’s new populist energy pushing the GOP away from its traditionally strong ties to corporate America.

Fitch Ratings pointed to political strains that transcend individual leaders when it announced Friday that it would keep the nation on credit watch despite congressional approval of the debt-limit deal. “There has been a steady deterioration in governance over the last 15 years, with increased political polarization and partisanship, as witnessed by the contested 2020 election, repeated brinkmanship over the debt limit, and failure to tackle fiscal challenges,” the ratings agency said in a statement explaining its reasoning.

The budget bill reduces projected cumulative deficits over the next decade and ensures the United States will continue to meet its commitments, Treasury Department Spokeswoman Lily Adams said in a written response to questions. “The Treasury market remains the safest, deepest and most liquid market in the world,” she said.

Michael Gapen, an economist for Bank of America, warned in a note to clients Friday that partisan divisions leave open the risk of a U.S. government shutdown later this year, despite the spending guideposts enshrined in the debt-limit deal. “While one brinkmanship risk has been removed from the table, one remains,” Gapen wrote.

The United States is unusual among major democracies in having a debt limit that can be a catalyst for crisis. Congress established the debt limit in 1917 as a way to handle a flood of borrowing to finance World War I and then raised it as needed.

Biden held out for months—“97 days” was McCarthy’s mantra of complaint—refusing to open talks with congressional Republicans and demanding a debt ceiling increase with no strings attached. But he gave in as the default date neared and the GOP House delivered him a debt increase authorization laden with conditions.

The latest drama has spurred Biden and other Democrats to search for ways to remove the threat of debt default from Washington’s partisan fights. “This debt limit makes no sense at all. We ought to get rid of it,” Representative Jim Clyburn, Democrats’ former No. 3 House leader, said Thursday on Bloomberg Television’s “Balance of Power.”

The Biden administration had been reluctant to use as a workaround an untested interpretation of a clause in the Constitution’s 14th Amendment that some legal scholars argue removes the necessity of a debt increase to cover spending already authorized by Congress. Treasury officials have long disliked the option because of fears that investors would demand higher interest rates on U.S. debt if repayment was subject to legal dispute.

But Biden seemed to be warming to the option on Sunday as he announced the debt deal with McCarthy after weeks of fitful negotiations. “I am exploring the idea,” Biden said, adding that any decision would come “at a later date, a year or two from now.”

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