The bipartisan debt ceiling deal struck by the White House and Republican House Speaker Kevin McCarthy this weekend after days of negotiations is heading to Congress on Wednesday for a major make-or-break vote.
The deal, which would suspend the debt ceiling until after the next presidential election in 2024, is considered a compromise and a win for both Republicans and Democrats. On one side, it would cap discretionary spending for two years. On the other side, defense spending would be permitted to rise 3 percent in 2024, in line with President Joe Biden’s budget request.
But a number of lawmakers from both sides of the political spectrum have spoken out against the deal, with Republican hardliners promising to “do everything” to stop it from being signed into law, as Pennsylvania Rep. Scott Perry said on Tuesday.
Any setback could be dangerous as the deadline for the Treasury’s default is quickly approaching. Treasury Secretary Janet Yellen, who had previously announced that the country will default on its debt on June 1, has recently extended the deadline to June 5. Companies like Moody’s and Goldman Sachs predict the X-date would be June 8 or 9.
So what would happen if a deal isn’t reached by then?
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Bernard Yaros, an economist at Moody’s Analytics focused primarily on federal fiscal policy, said that the company has created two scenarios if no deal on raising the debt ceiling is reached by June 8, when Moody’s estimates the Treasury will run out of cash to pay the government’s bills on time.
In one of the two downside scenarios outlined by Moody’s, the U.S. reaches June 8 without a deal and “the Treasury runs out of cash, it’s unable to pay all of its bills in full and on time,” Yaros told Newsweek.
Moody’s assumes that this breach of the debt limit would drag on for just a week before being resolved, but “even though it’s short lived, enough damage is done,” Yaros said. “Confidence is lost among households and businesses, financial markets are in an uproar, and everything is set in motion for a recession to follow afterwards.”
According to Moody’s, the recession that would follow a short-lived breach of the debt limit would be accompanied by the loss of about 1.5 million jobs, a drop in GDP from peak to trough by about by close to 1 percent, and a rise in unemployment by almost 2 percentage points.
“Compared to other recessions, it’s mild or moderate, but it’s still a recession,” Yaros said. “It still takes a toll on people’s lives and livelihoods. And it’s unnecessary because it’s a completely manufactured crisis.”
If that sounds bad, brace yourself for the much worse second scenario that Moody’s has set out—one where lawmakers don’t reach an agreement until July.
“This is the most cataclysmic scenario where you have a recession that is very much comparable to what we saw after the great financial crisis,” Yaros said.
“Assuming a June 8 debt limit breach that dragged on through July, the Treasury would have no choice but to eliminate a cumulative cash deficit of approximately $150 billion by slashing government spending,” Moody’s analysis, published earlier this month, reads. “As these cuts work through the economy, the hit to growth would be overwhelming.”
Other companies have been more positive in their view of the debt ceiling issue, refusing to believe that Congress would let the country default on its debt.
A report published by S&P Global in March stated that the company expected its outlook on the U.S. long-term rating—currently AA+/A-1+—to remain stable thanks to the “continued resilience in the U.S. economy” and given Congress’s ability to resolve the debt ceiling impasse in a timely manner.
“We expect Congress will engage in brinkmanship, but ultimately pass debt ceiling legislation, as it has on over 80 prior instances—understanding the severe consequences on financial markets and the economy of not doing so,” the outlook reads.
While solving the debt ceiling impasse a few days before the country’s default might still be considered somewhat “timely,” credit ratings agency Fitch Ratings believes that the back-and-forth between the White House and Republicans has opened up the country to more such confrontations in the future.
“The increasing use of debt limit standoffs to advance political agendas, combined with political polarization, is a recipe for more, not less, confrontation around the U.S. debt limit in the years ahead,” Fitch Ratings said in a statement sent to Newsweek.
“Repeated near-default episodes brought on by debt limit debates could erode confidence that the U.S. government’s repayment capacity is resilient to political dysfunction and may affect Fitch’s view of the sovereign credit profile.”