U.S. Treasury Secretary Janet Yellen, left, said the department would deploy special measures to avoid a borrowing default starting in mid-January while Congress takes up a debate over lifting the debt ceiling.
Kent Nishimura/Bloomberg
The U.S. borrowing cap resumes on midnight Wednesday, bringing with it the danger of a chronic political impasse that invites market dislocation, downgrades and other headwinds for municipal bond issuers and investors.
In a letter Friday to House Speaker Mike Johnson, R-La., and other Congressional leaders, Treasury Secretary Janet Yellen said she expects the U.S. will hit the borrowing limit in mid-January. To preserve money, the Treasury Department will begin to deploy its so-called extraordinary measures.
“Treasury currently expects to succeed in the brand new limit between Jan. 14 and Jan. 23, at which period it’s going to be mandatory for Treasury to begin taking extraordinary measures,” Yellen said. “I respectfully urge Congress to act to guard the complete faith and credit of the USA.”
Yellen has not said when the special measures could be exhausted, though some economists have pegged the “X date” at around next July or August. Congress would wish to resolve the looming debate before that date to avoid a first-ever U.S. default.
The extraordinary measures are likely, but not certain, to incorporate the suspension of latest sales on State and Local Government Series securities. State and native governments often purchase SLGS for his or her advance refunding escrows.
Suspending the sale of SLGS “limits counties’ ability to refinance or issue additional bonds to save lots of taxpayers money and proceed to finance critical infrastructure,” the National Association of Counties said in a May 2023 article throughout the last debt ceiling impasse.
Last yr, nevertheless, Treasury didn’t include the suspension in its first round of measures.
If the talk shouldn’t be resolved because the X-date nears, issuers are prone to hit the pause button on their borrowings and investors may hold off until the standoff is resolved.
Political battles over the debt limit have twice sparked downgrades of the U.S. sovereign rating. Last August, Fitch Rankings downgraded the U.S. federal government’s long-term credit standing to AA-plus from AAA, citing chronic debates over the debt ceiling, amongst other aspects. S&P Global downgraded the U.S. amid a political impasse on the federal debt limit in 2011.
The resolution to the 2011 borrowing limit debate created automatic spending cuts, or sequestration, that affect federal subsidy payments for direct-pay bonds like Construct America Bonds through next yr.
The 2023 deal between former House Speaker Kevin McCarthy and President Joe Biden suspended the debt ceiling until Jan. 1, 2025. The agreement, opposed by hard right Republicans, helped drive McCarthy out of office. The recent battle over a unbroken resolution illustrates the identical dynamics are at play.
President-elect Donald Trump and Johnson had pushed for the debt ceiling to be either prolonged or fully eliminated under the CR, however the proposal failed. “I call [the debt ceiling debate] ‘1929’ since the Democrats don’t care what our Country could also be forced into,” Trump said afterward a Truth Social post. “In reality, they would favor ‘Depression’ so long as it hurt the Republican Party.”
Republicans take full control of the Congress on Friday. They are going to have to either pass the debt ceiling provision as a part of a budget reconciliation bill or secure Democrats’ support for passage of a separate bill.
The problem can be a part of a full agenda that features full 2025 appropriations bills, tackling the expiring Tax Cuts and Jobs Act provisions and starting work on the subsequent surface transportation bill.