US president Joe Biden is set to meet congressional leaders from both parties on Tuesday amid a political stand-off over raising the borrowing limit of the world’s largest economy before it runs out of cash to pay its bills.
The high-stakes gathering at the White House is unlikely to yield any immediate breakthrough, but it will set the stage for fiscal negotiations that will dominate US politics and potentially reverberate around global financial markets over the coming weeks.
US Treasury secretary Janet Yellen has warned the US could face a historic and damaging default on its bonds in early June if Congress fails to act to raise the US’s $31.4tn debt ceiling. In a Sunday interview with ABC, she called it “an economic and financial catastrophe that will be of our own making”.
Heading into the meeting, both the White House and congressional Republicans were sticking to their positions.
Biden and Democratic leaders — including Chuck Schumer, the Senate majority leader, and Hakeem Jeffries, the House minority leader — say Congress needs to raise the debt limit without conditions, in order to pay for fiscal decisions previously made by lawmakers. They say negotiations over future tax and spending measures should be held separately.
But Republicans — including Kevin McCarthy, the House speaker, and Mitch McConnell, the Senate minority leader — insist the debt ceiling should only be raised as part of legislation that also slashes government spending.
“Both parties bear responsibility here, and both parties need to come together to deal with our crisis,” Mike Lawler, a Republican lawmaker from the northern suburbs of New York City. “Yes, we have to lift the debt ceiling. Yes, we have to pay our previous debts incurred. No, we cannot default. But we cannot continue to borrow and print at these levels.”
It is still far from clear which side might blink first. After Tuesday’s meeting with congressional leaders, Biden is due to fly to Lawler’s district as part of a strategy to pile pressure on the moderate, business-friendly wing of the party to force McCarthy to yield some ground.
So far, Republicans have remained more united than expected in support of McCarthy’s hardline stance. Any concessions to Biden would likely yield a backlash from the more intransigent conservative right flank of the party.
As the deadline approaches, the Biden administration has warned there were no good alternatives to raising the debt limit. Some of the ideas that been floated in the absence of a deal on Capitol Hill include ignoring the borrowing ceiling on constitutional grounds — because the 14th amendment states that the “validity” of US public debt shall not be “questioned” — or having the Treasury mint a $1tn coin, which would be used to satisfy the government’s obligations.
Another possibility would be for Congress to pass a short-term extension or suspension of the limit, giving lawmakers more time to negotiate.
“A short-term extension would obviously buy some more time here,” Lawler said. “But the president needs to show a good-faith negotiation with the speaker. Kicking the can down the road is not going to change the construct here.”
Political and market analysts are watching closely. “We believe the odds of the government defaulting on its debt obligations remain low. However, without a debt-ceiling deal, the probabilities of a technical default are not zero and headline risk will remain elevated until a resolution is passed,” Adam Turnquist, chief technical strategist at LPL Financial, wrote in a note on Monday.
John Canavan, lead US analyst at Oxford Economics, said investors were already “shunning debt maturing in June, July, and August”, while “bidding up the price on one-year credit default swaps to a record high”.
“There will likely be additional follow-through to those trading patterns if this week’s White House meeting between the leaders of both political parties fails to bring a deal — or a path toward one — closer,” he wrote in a note on Monday.
The Business Roundtable, a corporate lobbying group, said in a statement that finding a bipartisan resolution to the crisis “could not be more urgent.”
“The cost of a default, or even the threat of a default, is simply too high,” it said.
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