Key points about the Debt Ceiling

The debate in the US Congress on extending the government’s debt ceiling will be the main fiscal issue on the markets’ radar this year. On January 19, the government reached its legal debt limit of US$31.4 trillion (an all-time maximum). Therefore, we share some points that could influence the negotiations throughout this process:

•    Date “X”: The Treasury has not set a deadline. However, it is estimated that the actual date when the government would lack the necessary resources to pay all its obligations would be between July and September (this was expressed recently by the Congressional Budget Office, CBO). The determination of the “X” date will depend mainly on the income received via taxes during April. 

•    The Republican Party has a slight majority in Congress: Republicans do not have much bargaining power because the party has its lowest majority in the House since 2001-2003.

•    Tax revenues could decline: The government continually receives income through tax collection, although the pace and magnitude of those revenues depend more on the economy. Under this context, the market assumes that the economy could grow 0.6% this year. 

•    Restrictive financial environment: With interest rates rising rapidly, financing conditions have become more challenging. Therefore, future government spending could experience a significant impact (currently, interest payments represent 8% of tax revenue).

With the prospect that the Treasury may have exhausted its resources by the summer, the most likely scenario points to an agreement among lawmakers to raise the debt limit, where possible episodes of political controversy are not ruled out. In this sense, the Republicans will not increase the debt limit in exchange for spending cuts. At the same time, the Democrats would defend an increase in the limit so as not to fall into default and avoid increased tensions such as those experienced in 2011, when the S&P cut the government’s rating from AA to AA.  

Net interest Relative to other mandatory expenses 

Source: Raymond James 

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