There is still no agreement, but negotiators have agreed on positions. Democrats and Republicans are negotiating against the clock for an agreement to extend the debt ceiling before the date when the Treasury Department cannot meet its payment obligations. No one knows exactly when that X-date will be reached, but Treasury Secretary Janet Yellen has warned that it is very likely to be early June and there is a risk it could even be the first day of the month.
The agreement is taking shape. The idea would be to extend the debt ceiling by two years and in return set spending ceilings for the same period. That would cover what’s left of Joe Biden’s presidency. The spending limits would not affect military spending or veterans’ payments and would focus on other programs, but they would not be as aggressive as those included in the first Republican proposal passed as a bill in the House of Representatives. However, the figures are not yet certain and the negotiations could fail.
The deal would also include a measure to upgrade the country’s power grid to enable renewable energy, a key climate goal, while accelerating approvals for oil pipelines and other fossil fuel projects, according to sources familiar with the deal Republicans favor it, sources familiar with the deal quoted by the Bloomberg agency as saying.
The pact would save $10 billion from an $80 billion budget increase for the IRS that Biden was able to include in his Inflation Reduction Act. Republicans warned of a wave of inspections, often using false arguments, while Democrats said the higher spending would create jobs, provide better services and pay off in the fight against corporate tax fraud and higher incomes, but that would not affect the average and low income.
The pressure on negotiators is high on both sides, which could ruin the chances of a final agreement. The more extreme Republicans seem to prefer the United States to default than miss the opportunity to call for massive spending cuts. This Thursday, 35 Republican congressmen gathered under the leadership of Scott Perry and Chip Roy sent a letter to the Speaker of the House of Representatives, On that note, Kevin McCarthy. It is the same group that opposed McCarthy’s election in January and finally gave in, calling for toughness in the debt ceiling negotiations, among other things.
McCarthy won’t have an easy time convincing her to accept a deal that also has White House approval. For his part, Biden must also be careful that there are no departures from his ranks. As the negotiation progresses, the two parties maintain political rhetoric, blaming the other party for a possible failure.
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This Thursday, Biden used an act unrelated to the presentation of his proposal to appoint General Charles Brown as chief of staff to set out his position on the negotiations. “Speaker McCarthy and I have had several productive conversations, and indeed our teams are still meeting as we speak and making progress. I have made it clear time and time again: defaulting on our national debt is not an option. The American people deserve reassurance that they will continue to receive their Social Security payments, that VA hospitals will continue to open, and that we will continue to do well financially. A default jeopardizes all of that. Congressmen get it, and they all agree: there will be no default. And it’s time for Congress to act now,” he said.
Biden insists the negotiations are about the budget, not a default, and claims the two parties have conflicting ideas about the United States. According to the President, Republicans want to shift that burden onto the shoulders of working Americans and the middle class by cutting the number of teachers, police officers, border patrol agents and increasing waiting times for Social Security applications. Biden wants to bring companies (especially oil and pharmaceutical companies) and high incomes.
Congressmen adjourned for the holiday weekend (Monday is Memorial Day) without reaching an agreement, but negotiators, including McCarthy and Patrick McHenry, a North Carolina Republican, will continue their work over the weekend. “We know where our differences lie. We don’t have an agreement yet. We knew it wouldn’t be easy. It’s difficult, but we’re working. And we will keep working until we make it,” McCarthy told reporters on Capitol Hill.
The markets remain closed for three days and there is hope that they will be enough to close a deal. The markets suffered from uncertainty. Stock markets experienced multi-day declines and some distortions occurred in the debt market. In particular, investors are demanding a risk premium for bills due in early June, the days with the highest risk of default. The annual return on these bills has at times exceeded 7%, but in reality they are only days away from expiration, so the premium is minimal. One-year bills are at 5.2%, which is in line with official short-term interest rates.
Fitch has downgraded the US AAA credit rating to negative and DBRS Morningstar has done the same. Interestingly, the experience of 2011 suggests that even in a Treasury default risk scenario, investors (paradoxically) seek refuge in Treasuries, often causing the price to rise and their interest rates to fall. The stock market is usually penalized the most.
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