By Karen Pierog

(Reuters) – An apparent truce in the deadlock on the US debt ceiling in Congress has offered some relief to Wall Street investors on the brink of a possible default, but analysts must assess the risk of a new crisis at the end of the year.

Leaders of major banks and financial institutions have warned lawmakers of a catastrophe if the debt ceiling is not raised by October 18, when the government expects to run out of liquidity, resulting in a debt default. payment of its debt.

A plan launched on Wednesday by Republican Senate leader Mitch McConnell would extend the borrowing limit until December – offering respite but no long-term solution.

“There will be many proposals, trial balloons and negotiations going on to resolve this issue,” S&P Global Ratings senior US sovereign credit analyst Joydeep Mukherji said on Wednesday in an email, adding that the S & P’s perspective on the underlying US credit rating had not changed. .

Mukherji said in a recent interview that the scenario of a drop in America’s AA-plus credit rating to D due to a default was “crazy, almost difficult, impossible to imagine.”

Markets reacted positively to news of a potential, albeit temporary, solution on Wednesday with equities rising and Treasury yields falling.

“Two months seems like a long time and (we) think the debt ceiling would be raised by reconciliation by then and don’t expect to know last week in December,” NatWest analysts wrote in a statement. research note Wednesday.

Republicans said Democrats could use the intervening weeks to pass a longer debt ceiling extension through a complex process called reconciliation, which would allow Democrats to muster their slim majority in the Senate to approve the measure without any Republican backing. .

Goldman Sachs analysts wrote on Wednesday that the end result could be “what seemed like the most likely outcome from the start, that Democrats use the reconciliation process to raise the debt limit just before the deadline. “after exhausting all other options.

Even so, there are serious risks for President Joe Biden and his fellow Democrats.

As part of the temporary extension plan, Democrats are expected to address the debt ceiling issue again in December, just as another federal government shutdown looms. This could complicate their efforts to pass two massive spending bills that make up a large part of Biden’s national agenda.

Mike O’Rourke, chief market strategist at JonesTrading, wrote in a note to clients that he expected McConnell “to continue to grant limited debt limit extensions until the mid-election. -Mandate (2022) if the lack of urgency continues to slow Democrats “reconciliation spending bill”.


The stakes are high if a solution is not found.

Financial risk management firm Moody’s Analytics, which is a separate entity from Moody’s Investors Service, said a default would be a “catastrophic blow” to the United States’ economic recovery from the COVID-19 pandemic and disrupt global financial markets.

Moody’s Analytics noted that an inadvertently missed payment of treasury bills in 1979 caused bond yields to jump 60 basis points and remain high for several months at the cost of tens of billions of dollars. The 1979 technical defect was attributed to check processing issues.

The major rating agencies don’t expect the United States to default. Yet Mukherji and his counterpart at Fitch Ratings said in recent research and interviews that a default, including temporary or said to be technical, on any payment of treasury bills, notes or bonds would lower the respective ratings of the AA-plus and AAA countries. to D.

Moody’s Investors Service, which rates the US Aaa with a stable outlook, said it saw a “limited” impact on the country’s rating in the event of default and would likely downgrade all US Treasuries. and would keep it in review until it was clear “a cure would come.”

Even without default, if no solution is in place to avoid a cash crunch, the United States risks losing another of its AAA ratings. S&P noticeably downgraded the rating one notch to AA-plus on August 5, 2011, following a series of political wrangling over the country’s debt.

Major financial institutions have viewed the United States as a credit rated AA plus since October 2020, down from AAA where it had been since 2017, according to David Carruthers, head of research at Credit Benchmark, a financial data and analysis company that gathers internal data. the credit risk views of more than 40 institutions around the world, including 15 global systemically important banks.

Mukherji in an interview last week said that a US default on debt payments would be highly unusual as it would be the result of political and not economic issues. Yet, at the end of the day, it’s the same.

“If you don’t pay, for whatever reason, you are in default.”

(Reporting by Karen Pierog; editing by Megan Davies and Leslie Adler)

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