Democrats Are Expected to Retreat on US Debt-Ceiling Demands, Survey Shows

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(Bloomberg) -- President Joe Biden and congressional Democrats will ultimately retreat from their insistence on a “clean” increase in the federal debt ceiling, the majority of economists in a Bloomberg survey said — predicting an end to the partisan standoff with little risk of default and a limited effect on the US economy and financial markets.

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Around 71% of the 51 economists surveyed last week see less than a 10% chance of a payments default, and all respondents agreed that it is more likely than not that Congress raises the debt ceiling before the US reaches its X-date, when the Treasury Department officially runs out of fiscal space. Extraordinary measures used to keep payments going could be exhausted as soon as early June, Treasury Secretary Janet Yellen has signaled.

But the economists were split on exactly how lawmakers would get there: about 40% predict Congress will establish a panel to stabilize the long-term fiscal picture, and just under a third think Republicans will be successful in exacting spending cuts out of the negotiations. Only five — under 20% — see a clean hike as the White House has demanded.

Biden and House Speaker Kevin McCarthy are set to meet on Wednesday to discuss the debt limit, and it’s unclear exactly what the California Republican will propose.

Read more: McCarthy’s Moderate GOP Allies Float Their Own Debt-Limit Ideas

In contrast with grave warnings from some officials and pundits in Washington, the survey respondents aren’t particularly worried about the negotiations’ impact on the economy or financial markets.

But given dysfunction in the House and McCarthy’s concessions to win the speakership — including a commitment to cuts in order to raise the debt ceiling — Wall Street is paying attention, said Mark Zandi, chief economist at Moody’s Analytics.

“Markets are really attuned and very sensitive to it much earlier than in times past, and that would be consistent with the idea that the market reaction is going to be greater than in other times, including 2011,” Zandi said. “Ironically, it’s a good sign because we need markets to react for lawmakers to sign on the dotted line.”

Read more: Zandi Says Too-Calm Investors Raise Risk of US Default Calamity

The debate on Capitol Hill hinges on the budget deficit, which has ballooned under presidents of both parties — a goal that some Democrats, too, agree should be a priority. Economists in the survey almost unanimously agreed that the current US fiscal trajectory is unsustainable, but they were split on when the problem will bubble over into a crisis: half said reforms will be needed starting soon, while most others said Congress can afford to wait until 2024.

The economists were also split on the more immediate deadline — the X-date — which 27% think could come in June and most agree will arrive in the summer months.

As that date inches closer, investors will be on watch for the risk of any US sovereign credit-rating downgrade — like when S&P Global Ratings cut the US sovereign assessment from AAA in 2011.

As to what could happen after any downgrade this time, it’s anyone’s guess: While 57% of survey respondents said Treasuries would rally as they did a decade ago, two in ten respondents think that this time, they would fall. The last quarter of respondents say that, as of now, they didn’t know.

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