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U.S. Debt Ceiling: Playing a Dangerous Game (Again)

A familiar debate has once again gripped Washington DC, with Democrats prioritizing passage of a large budget increase containing significant new entitlement programs, and Republicans withholding their support for a debt ceiling increase. Both sides blame each other for the impasse, while the space that the Treasury has to borrow and meet federal government obligations gradually dwindles. At this stage, Treasury Secretary Janet Yellen has signaled that the Treasury will most likely run out of space to borrow sometime during the month of October. Absent an agreement to raise the debt ceiling, the U.S. once again runs the risk of defaulting on its obligations.

Difficult political negotiations often come down to the wire in the United States and have always in the past resulted in a compromise before running into any constraints on meeting debt obligations. Neither party wants to deal with the repercussions of missed payments on debt or any other federal government obligation. Furthermore, at this juncture, Democrats have narrow control over the House and Senate and have the ability to pass a debt ceiling increase in spite of Republican opposition, under reconciliation rules. This distinguishes the current situation from prior episodes in 2011 and 2013.

However, current plans are to keep the debt ceiling increase separate from the budget legislation. This strategy would require Republican support, which at present appears unlikely to be forthcoming. Absent a shift in strategy from at least one of the two parties, the risk of miscalculation grows with every passing day, and may ultimately result in the U.S. rating being placed under review, similar to our actions taken in 2013.

“The U.S. retains some exceptional credit strengths, and its ratings are underpinned by its high degree of economic, institutional and financial resilience,” notes Thomas R. Torgerson, Co-Head of Sovereign Ratings at DBRS Morningstar. “However, DBRS Morningstar considers brinksmanship with the debt ceiling to be a dangerous game - atypical of a 'AAA' rated sovereign.”