- Banking
- Wealth
- Privileges
- NRI Banking
- Treasures Private Client
- The US debt situation is once again under the spotlight, given the looming x-date in early June
- Negotiations over the debt ceiling has become contentious under a divided Congress
- Biden, GOP have reached an in-principle agreement but Congress must approve to avert a US default
- We maintain our base case that US Congress would not stand idly by
- With heightened volatility expected over this issue, investors should keep a posture of prudence
Markets have largely shrugged off the possibility of the US defaulting on its debt, and Washington has finally made significant progress on its debt ceiling bill with an in-principle agreement between President Biden and House Speaker Kevin McCarthy to raise the debt ceiling. Nonetheless, it remains alarming that Congress has mere days left to approve a deal to avert a US default (projected to take place by 5 June), that could have calamitous effects on the global economy.
For easy reference, here is a list of questions and answers regarding the US debt ceiling issue, along with some recent developments.
1. What is the debt ceiling?The debt ceiling was created by Congress in 1917, to set a maximum of outstanding debt the US government can incur.
2. Why has the debt ceiling been in focus of late?The debt ceiling was reached in January 2023 when the total national debt hit USD31.4t. In response, the Treasury invoked “extraordinary measures” to continue operating. In May 2023, Treasury Secretary Janet Yellen warned that these measures could be exhausted by early June 2023 (the x-date). Given our proximity to the x-date, Congress must now vote to suspend or raise the debt ceiling or risk a US default.
3. What is the “x-date”?The x-date refers to the point where the US government’s funds are no longer sufficient to meet its financial obligations. Most current estimates are for early June, but it is not possible to gauge the exact date.
4. What happens if an agreement is not reached by the x-date? / What are the consequences of a US default?- Higher borrowing costs: US Treasuries have long been viewed as risk-free assets, keeping their rates very low. A default would cause borrowing costs – including credit card, car loans and mortgage rates – to spike because US debt serves as a critical benchmark for various forms of credit.
- Risk-asset price fragility: Higher risk-free rates will inflate discount rates, which are used to value assets. Steeper discount rates will compress valuation across asset classes, hitting investor confidence.
- Delayed payments: Payment to millions of civil servants, social security beneficiaries etc. will be delayed indefinitely. Businesses and households will be unable to pay their bills while awaiting government receivables. This may lead to further tightening of liquidity and cause the economy to accelerate towards a recession.
- Broad financial instability: The belief that America’s government will pay its creditors on time underpins the smooth functioning of the global financial system. It makes the dollar the world’s reserve currency and US Treasury securities the bedrock of bond markets worldwide. A breach of the US debt ceiling would likely cause severe damage to global economies.
- No disorderly default – Noting the above repercussions (see point 4), we believe that it is not in the interest of either side of congress to allow a disorderly default. There is a high likelihood that Congress will approve a raised debt ceiling (see point 6), even if it just barely before the x-date.
- Greater fiscal prudence to alleviate the need for further monetary tightening – Greater fiscal prudence of the US in managing its ballooning debt would (a) ease inflationary pressure, and (b) tighten consumer confidence in the medium term. This implies that the Fed need not hike much further as credit conditions would already tighten in response to such spending cuts.
Download the PDF to read the full report.
Topic
This information herein is published by DBS Bank Ltd. (“DBS Bank”) and is for information only. This publication is intended for DBS Bank and its subsidiaries or affiliates (collectively “DBS”) and clients to whom it has been delivered and may not be reproduced, transmitted or communicated to any other person without the prior written permission of DBS Bank.
This publication is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to you to subscribe to or to enter into any transaction as described, nor is it calculated to invite or permit the making of offers to the public to subscribe to or enter into any transaction for cash or other consideration and should not be viewed as such.
The information herein may be incomplete or condensed and it may not include a number of terms and provisions nor does it identify or define all or any of the risks associated to any actual transaction. Any terms, conditions and opinions contained herein may have been obtained from various sources and neither DBS nor any of their respective directors or employees (collectively the “DBS Group”) make any warranty, expressed or implied, as to its accuracy or completeness and thus assume no responsibility of it. The information herein may be subject to further revision, verification and updating and DBS Group undertakes no responsibility thereof.
All figures and amounts stated are for illustration purposes only and shall not bind DBS Group. This publication does not have regard to the specific investment objectives, financial situation or particular needs of any specific person. Before entering into any transaction to purchase any product mentioned in this publication, you should take steps to ensure that you understand the transaction and has made an independent assessment of the appropriateness of the transaction in light of your own objectives and circumstances. In particular, you should read all the relevant documentation pertaining to the product and may wish to seek advice from a financial or other professional adviser or make such independent investigations as you consider necessary or appropriate for such purposes. If you choose not to do so, you should consider carefully whether any product mentioned in this publication is suitable for you. DBS Group does not act as an adviser and assumes no fiduciary responsibility or liability for any consequences, financial or otherwise, arising from any arrangement or entrance into any transaction in reliance on the information contained herein. In order to build your own independent analysis of any transaction and its consequences, you should consult your own independent financial, accounting, tax, legal or other competent professional advisors as you deem appropriate to ensure that any assessment you make is suitable for you in light of your own financial, accounting, tax, and legal constraints and objectives without relying in any way on DBS Group or any position which DBS Group might have expressed in this document or orally to you in the discussion.
Any information relating to past performance, or any future forecast based on past performance or other assumptions, is not necessarily a reliable indicator of future results.
If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of the Information, which may arise as a result of electronic transmission. If verification is required, please request for a hard-copy version.
This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
If you have received this communication by email, please do not distribute or copy this email. If you believe that you have received this e-mail in error, please inform the sender or contact us immediately. DBS Group reserves the right to monitor and record electronic and telephone communications made by or to its personnel for regulatory or operational purposes. The security, accuracy and timeliness of electronic communications cannot be assured.