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Seven Questions for Investors on the US Debt Ceiling
Friday 26 May 2023
Investment Talks
Seven Questions for Investors on the US Debt Ceiling
May 2023 | The current US debt ceiling was reached in January and the US Treasury warned that it would run out of cash to meet its expenditure commitments around June 1st, although a precise date is impossible to predict. The Republicans’ initial proposal asked for spending cuts to the tune of a 1% limit on the annual growth of nominal government expenditure over the next ten years. This fiscal contraction, along with a tight monetary stance, would be negative for economic growth. However, a default would be even worse for the economy.
01 | We think there is a good chance that an agreement to raise the debt ceiling will be reached soon, as it has been raised multiple times in the past. However, agreement requires approval of both chambers of Congress.
02 | If agreement is not reached by June 1st, the government could enter into debt prioritization for a short period of time, paying debt servicing and debt principal payments before other expenditures.
03 | A default would have terrible consequences for the markets, because US Treasuries are considered to be the safest asset in the world, against which the pricing of all other financial assets (credit, equities etc.) is benchmarked.
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