“Passing the debt ceiling is like passing a kidney stone”

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Sigh. On the one hand it was unfortunately predictable that we would end up here. On the other hand, it is extremely boring that we are always discuss whether the United States will increase the debt ceiling, and what the consequences would be if not.

Anyway, Pimco added that he still has “high conviction” that it will be lifted before the US Treasury runs out of money at the end of the month.

It might be superfluous to say this, but Pimco obviously has a pretty massive vested interest in this saga’s demise, so it could just be hope disguised as analysis. Yet Pimco’s Libby Cantrill has a vivid way of describing why.

After all, even if neither side apparently has the political incentive to make concessions before being forced to, neither side has the political incentive to default either. To use an apt, albeit graphic, analogy: Breaking the debt ceiling is like passing a kidney stone – we know it will pass, it’s just a matter of pain. We affirm that we are in the painful period at this time.

Of course, you really have no choice but to develop and pass on a kidney stone. It’s more like the American political establishment (and yes, overwhelmingly Republicans) repeatedly banging their heads against a brick wall because they think it plays well with the base.

Either way, Cantrill argues that the outlines of a deal have been known for some time. She describes them in the following list, which we have reformatted but not modified:

– recover unused COVID-19 money

— caps on “discretionary” spending (which represents about 25% of the US government’s $6 trillion annual budget)

— work requirements for specific entitlements (which sound pretty good but tend to be cumbersome to administer, and therefore little from a deficit perspective)

– and possibly a down payment on the reform of energy permits (both traditional and clean).

She adds that there may also be some minor changes to Medicare’s reimbursement process for hospital treatments. The biggest sticking points include base spending for 2024 and longer-term discretionary spending caps, but Cantrill doesn’t think much will really change there.

Here’s how she sees the process unfolding, with Pimco’s emphasis below:

Overall, we believe policy makers will find common ground that will likely result in little to no spending cuts in the near term, but will produce longer-term deficit savings relative to current CBO projections. Of course, to really tackle the country’s fiscal sustainability, policymakers would have to tackle the elephant in the room – entitlement spending – but that’s politically a non-starter on both sides of the aisle. gone for the foreseeable future.

When, realistically, should legislators reach an agreement? Everyone is working towards the June 1 Treasury date. To meet this deadline, negotiators likely need to reach a high-level agreement by the middle of this week in order to draft a legislative text, and then proceed to the procedure of the House and the Senate. Once a deal is done in principle, there may be more drama around getting enough support for the deal among grassroots members, but we think there will be enough support from both sides of the aisle to pass a bill. Also, if Congress needs more time to negotiate or put pen to paper, we may see a short-term extension of one or two weeks at most.

We don’t expect the invocation of the 14th Amendment. Lately, there has been more noise about President Joe Biden’s possible use of the 14th Amendment to effectively ignore the debt limit, citing the clause that public debt “shall not be questioned.” However, Treasury Secretary Janet Yellen continues to insist that the only way to fix the debt ceiling is through Congress. From a market perspective, the amendment approach seems unlikely given the uncertainty it could create, and it also seems unlikely from a political perspective, given the expected backlash. .

Market reaction: If past debt ceiling situations are prologue, equity markets could wobble this week depending on the course of negotiations, but assuming the expected deal crystallizes and there is no default, the markets could probably pull back after a resolution. (There was an exception in 2011, when stock markets continued to fall after the resolution and X date, partly because of the European debt crisis and partly because of the anticipation of large debt reductions. expenses that were part of the resolution.) That said, we have already experienced significant disruptions in the fixed income market, creating both risks and opportunities – for more details see our recent Point of view, “Debt ceiling debate: examining the risks around date X.”

At the end of the line : While the next few days or weeks will likely be noisy, we remain constructive on a deal reached before the June 1 date, with an outside possibility of a short-term extension (measured in weeks, not months). As a result, lawmakers (and markets) would likely not have to deal with the debt ceiling again until 2025, after the much-anticipated 2024 election. No one seems to have the political incentive to compromise until the last minute, so we could see some pain and drama ahead of next week’s deadline, but the overall outcome seems clear to us: a debt ceiling resolution will pass.

These views are from Tuesday morning May 23, 2023.

It’s always fun when you have to specify not only the date of your prediction, but also the time of day. What a shit show.