Debt Ceiling 2023: Wall Street Traders Pen Letter to Yellen Warning of ‘Costly’ and ‘Long-Term’ Implications if US Defaults

Government Debt Ceiling and Federal Government Shutdown, National Debt Ceiling & USA Credit Worthiness.
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A group of financial experts sent a letter to Treasury Secretary Janet Yellen, not only warning of the “costly” and “long-term” implications if the U.S. were to default but saying that the consequences of such an event would be “seismic.”

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“The short-term impacts of a protracted negotiation are costly; the long-term implications of a default are unthinkable. We are at the peak of the nation’s debt needs and expect those needs to only increase further,” the 17-member group of current and former chairs and vice chairs of the Treasury Borrowing Advisory Committee wrote in the May 9 letter.

The letter comes on the heels of Yellen telling Congress that the U.S. could default on its debt as early as June 1. The so-called X-date (when the country will default) has been pushed earlier than previously anticipated, as in a Jan. 13 letter, Yellen wrote that “it was unlikely that cash and extraordinary measures would be exhausted before early June.”

And on May 11, Yellen reiterated that the mere threat of default could lead to a downgrade of the country’s credit rating and a weakening of consumer confidence.

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“We could see a rise in interest rates drive up payments on mortgages, auto loans, and credit cards. We are already seeing spikes in interest rates for debt due around the date that the debt limit may bind,” she said according to prepared remarks.

Negotiations have been at a stalemate for months, and still are, despite a compressed timeline and a meeting between President Joe Biden met with Republican leaders on May 9. Punchbowl News reported that Speaker Kevin McCarthy, Senate Majority Leader Chuck Schumer, House Minority Leader Hakeem Jeffries and Senate Minority Leader Mitch McConnell will meet again with President Joe Biden on May 12.

The financial experts said that a protracted standoff over the debt limit would dramatically increase taxpayer costs and exacerbate market stress.

“Further, any delay in making an interest or principal payment by Treasury would be an event of seismic proportions, not only for financial markets but also the real economy,” they warned.” “A U.S. government downgrade or default would surge broadly throughout the real economy.” 

They added that a broad range of issuers would be indirectly impacted, a partial listing of which would include hospitals relying on Medicare disbursements, universities with significant federal funding, and Public Housing Authorities. 

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“The financial market and banking system stress which began in March 2023 reinforces how integral a well-functioning U.S. Treasury market is to the real economy. The total economic impact of the failure of SVB [Silicon Valley Bank] and others is yet to be seen, but reduction in credit availability has already begun, making loans more difficult for individuals and small business to secure. With financial markets on edge, continuing to debate raising the debt limit is reckless and irresponsible.”

Finally, they called not only for a hasty resolution but for a permanent fix to the debt ceiling.

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On May 3, the White House Council of Economic Advisers said that an actual breach of the U.S. debt ceiling would likely cause severe damage to the U.S. economy. Citing a recent analysis by Moody’s, they note that under a clean debt ceiling increase, job growth continues over the next few quarters, adding 900,000 jobs. However, under a protracted default scenario, job losses amount to almost 8 million and the market would crash.

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“An actual default in the coming months would likely trigger additional ratings downgrades with severe implications for market interest rates and increased volatility in U.S. equities. A technical default would also have severe consequences for millions,” said John Lynch, CIO for Comerica Wealth Management.

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