The US debt crisis, which threatened to plunge markets and the economy into a serious crisis within two weeks, seems to have been avoided, at least for now. The specter of a historic and imminent US default, as early as October 18, has been dispelled by a compromise that took shape overnight between Democrats and Republicans and that intends to raise the debt ceiling enough to cover the needs of the next two. months.
A short-term compromise
Republican Senate leader Mitch McConnell softened his opposition, offering Democrats not to stonewall a vote to raise the federal debt limit to a new set high to allow Joe Biden’s administration to meet obligations. of the government until December. Barring surprises, the details and a vote in the Senate, with a simple democratic majority instead of a qualified majority of 60% for the Republican decision to renounce obstruction, are expected as of today.
“We will allow Democrats to use normal procedures to approve an emergency debt ceiling extension to a fixed dollar amount to cover what is needed until December,” McConnell said via Twitter. Numerous Democratic senators, including left-wing leader Bernie Sanders, have called the breakthrough as welcome and said opponents have caved.
The pressure of the CEOs
The pressure on the Republicans had grown as the hours passed. Biden met with a number of Corporate America chief executives yesterday afternoon, beginning with executives from large banks such as JP Morgan, Citigroup and Bank of America, to reinforce his call not to play with the country’s debt and credit rating. Jane Fraser, CEO of Citi, had denounced that “the economy is already suffering damage” for the specter of a default. JP Morgan’s Jamie Dimon stressed that “we also recommend that children pay off their debts.” Adena Friedman of the Nasdaq had denounced the risks for “hundreds of millions of investors” in the world, saying that the reaction of the markets would be “very, very negative”.
A heart-pounding match
The debt game had become increasingly difficult and dangerous: the Treasury’s flexibility measures, to avoid breaking through a maximum prerogative of the Congress and now reached in the summer, were being exhausted. Treasury Secretary Janet Yellen warned that resources would begin to run out on October 18 and that a default would be accompanied by financial meltdowns and recessions. But Republicans had so far blocked plans to suspend or raise the ceiling until the end of 2022 in protest against the social spending plans proposed by the Democrats. This despite the fact that new bond issues actually serve to cover not new expenses but obligations contracted in previous years, including tax reliefs and anti-Covid aid wanted by the conservatives themselves. The debt ceiling was suspended by mutual agreement by the two parties for two years in 2019, returning to effect in July at the level of 28.5 trillion.