Debt ceiling: Lawmakers to wrestle with resolution through holiday weekend

May 25, 2023 at 11:57 a.m.

Hoover Institution Fellow Lanhee Chen sits down with Yahoo Finance Live to talk about the timeline of the debt ceiling negotiations between lawmakers and how markets are responding to the debt crisis.

Video Transcript

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- America's political partisanship could cost the nation its triple-A credit rating. Fitch Ratings placing the country on rating watch negative, signaling it could downgrade if lawmakers are unable to raise the debt limit. Now, Fitch says it expects a resolution to be reached before the X-date.

Lawmakers' failure to meaningfully tackle fiscal challenges signals risks to US creditworthiness. Now, in 2011, the S&P gave its first ever credit downgrade to the US, cutting its rating to AA-plus and sending Treasury yields down. More than a decade later, that agency has still not restored its rating.

Joining us now is Lanhee Chen, Hoover Institution fellow. And he recently authored an opinion piece for CNN titled, "How To Resolve the Debt Ceiling Standoff Without Risking A Default." something I'm sure a lot of us would like to know. What would that involve?

LANHEE CHEN: Well, quite simply, it's about kicking the can down the road, essentially creating an environment where they can resolve some of the broader fiscal issues because I think that's the challenge in the current conversation. They're not focusing just on raising the debt ceiling. They're having a conversation about what the appropriate spending levels are, what the appropriate fiscal policy is.

And the point that I make is simply that is an appropriate conversation to have in the context of the budget process, which would happen later this year. So punt the debt ceiling deadline through early October, and that puts pressure on them to resolve not just the debt ceiling later this year, but the fiscal issues that the Republicans, for example, want to address. So some might argue that it's creating a dual fiscal cliff, if you will. But I would simply say that you've got to think about the political pressures and political incentives involved and try and align them a little bit better in thinking about how we resolve the current crisis.

- I mean, when you look at the amount of time they have even to decide whether or not to kick the can down the road-- I mean, we have a holiday weekend coming up, you know, the holiday on Monday. How much time do they actually have to realistically get this into play?

LANHEE CHEN: Well, they're going to have to work through the holiday weekend. I don't think there's really any ability to take time off right now, given the proposed X-date of June 1 and maybe a few days of wiggle room beyond that. So they are going to have to reach a resolution. You know, Speaker McCarthy had originally said he wanted to see the framework of a deal by the end of the week if they were going to have the ability to get it vetted and voted on before we reach the X-date.

That date is perilously close. So we're within probably a couple of days of having to get that deal done. There is a lot more optimism, which I think people should take positively. But at the end of the day, there's no deal until there's a deal. And so we're going to have to see how these next 48 to 72 hours play out.

- And we've been seeing the market in something of a holding pattern at the moment, you know, really not sure what's going to happen. But what, if anything, is really going to incentivize both sides to sort of rush and at least come to something, whether it's kicking the can down the road or coming to, actually, a substantive deal?

LANHEE CHEN: Well, I think it's going to have to be, you know, market signaling in a more definitive way that there's real concern about that deal not happening. I think the reality is, yes, markets are in a holding pattern, but the default assumption, I think, for most people continues to be they'll get it done. They'll go right up to the deadline, and then they'll get something done. I mean, we've seen this movie before from the last fiscal standoff that we had in the early 2000-teens.

So it's difficult to make firm conclusions, I would say, about how legislators will act. And to a certain degree, I think they all understand the urgency of it. That having been said, I think until there is a more urgent signal that people really and honestly believe a deal might not get done, then I think you're going to continue to see them moving at the pace that they're moving, trying to get a deal done. I think they understand, as I said, that they've got to get this done. It's just a matter of actually crossing all the political bridges that need to be crossed.

- And in the event-- obviously, this would be sort of uncharted territory, in this day and age at least. In the event of a default, what should people know about their finances and what they should really expect in terms of fallout in the initial days?

LANHEE CHEN: Well, I mean, I think the fallout would be tremendous. I think obviously, you would see significant pull-backs in a number of different parts of the economy. I think you'll obviously see a market reaction. I think there will be significant and catastrophic impacts were that to happen across the economy. I don't think it would be limited to any single sector. This is not something that just affects technology or just affects hospitality or just affects one element of the economy.

So I just don't see that happening. I know you hear a lot of people say that. And we're in unprecedented and uncharted territory from a political perspective. That having been said, the outcome of such a default or failure to raise the debt ceiling would indeed be catastrophic. And I think people realize that. It's just sometimes the urgency doesn't always meet the moment.

But I do think, for what it's worth-- everything I have heard from people on Capitol Hill, everything I've heard from people who are involved in these conversations right now is that both sides are working earnestly to achieve some resolution. I think the question will be, once the resolution is reached, will that be acceptable to Democrats in the Senate and Republicans in the House? And there's a political dynamic that we can't forget here.

- And we know, of course, Treasury secretary has set that June 1st X-date. We're seeing some flexibility, some sort of different estimates as to what that X-date might actually be. But should we really be taking the June 1 X-date at its word, do you think?

LANHEE CHEN: Well, yeah, for a while, I think people were wondering, you know, is this a political posturing technique that Secretary Yellen and the administration are using? I think given where revenue collections have been, given everything that we've seen, that June 1 general time frame is probably an accurate assumption regarding when, in fact, the debt ceiling needs to be raised. People have to remember, it's not a hard date. It's not like June 1 at midnight, we turn into pumpkins.

It is a range of dates when we believe that the extraordinary measures being used by the Department of the Treasury are no longer going to be sufficient to cover the obligations that the US government has. And so that could be June 1. It could be June 3. It could be June 5. That June 1 date is an estimate.

And so once we get a little bit closer, presumably, we'll have a little bit more of a sense of, OK, what is the exact date? But, you know, I think folks need to understand that it's not like your taxes being due April 15. June 1 is an estimate, and it continues to be a relatively soft estimate.

- That's an important context there to add. Lanhee Chen, thank you so much, Hoover Institution fellow. Thank you for your time this morning.

LANHEE CHEN: Great to be with you. Thank you.