Will the United States really default on its debt? JPMorgan warns odds are rising

New Constructs CEO David Trainer gives his economic outlook amid the Federal Reserve’s handling of inflation and the June 1 debt ceiling deadline on “The Claman Countdown.”

There is a one in four chance that negotiators in Washington will fail to raise the debt ceiling and that the US government will not be able to pay its bills on time.

That’s according to JPMorgan analysts, who warned in a note to clients this week that the odds of a first-ever default are rising as President Biden and Republicans struggle to strike a deal ahead of the looming deadline. June.

“We still believe the most likely outcome is a deal signed before date X, although we see the odds of passing that date without a cap increase at around 25% and rising,” the chief US economist wrote. of JPMorgan, Michael Feroli. in the note.

WHO WOULD BE HARDEST AFFECTED BY A US DEFAULT?

From left, Senate Minority Leader Mitch McConnell, R-Ky., House Speaker Kevin McCarthy, R-Calif., President Biden and Senate Majority Leader Chuck Schumer, DN.Y ., gather in the Oval Office of the White House in Washington, DC on May 9, 2023. (Anna Moneymaker/Getty Images/Getty Images)

In a scenario where the United States breaches the debt limit, Feroli predicted that the Treasury Department would prioritize debt principal and interest payments.

“While this would avoid a technical default, there would still be several negative effects, including a likely downgrade in the US credit rating,” he wrote.

RISKS OF HITTING THE DEBT CEILING TRIGGER ‘SELF-INFLICTED’ RECESSION

The note comes amid a protracted standoff over the debt limit. Republicans, who control the House, have promised to raise the borrowing limit only in return for spending cuts. President Biden and his fellow Democrats, who control the Senate, prefer a “clean” debt ceiling bill with no spending cuts.

The White House is now holding near-daily talks with Republicans as Washington races to strike a budget deal before the deadline, which could come as early as next week.

House Speaker Kevin McCarthy, R-California, insisted on Tuesday that he was confident negotiators could reach a deal after the latest round of talks with the president and said the two sides had ” make some progress”.

People walk in front of the U.S. Capitol in Washington, DC, June 9, 2022. (AP Photo/Patrick Semansky, File/AP Newsroom)

WHAT IS THE DEBT CEILING AND WHAT DOES IT MEAN TO YOU?

“We worked well past midnight last night,” McCarthy told reporters Thursday morning. “I think we’ve made progress. There are still some outstanding issues, and I’ve asked our teams to work 24/7 to try to resolve this issue.”

The debt ceiling, which is currently about $31.4 trillion, is the legal limit on the total amount of debt the federal government can borrow on behalf of the public, including Social Security and unemployment benefits. health insurance, military salaries and tax refunds.

If the United States fails to raise or suspend the debt ceiling, it may have to temporarily default on some of its obligations, which could have serious negative economic consequences. Interest rates would likely skyrocket and demand for Treasuries would fall; even the threat of default can drive up borrowing costs, according to the Committee for a Responsible Federal Budget.

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Although the United States has never defaulted on its debt before, it came close in 2011 when House Republicans refused to pass a debt ceiling increase, prompting the rating agency Standard and Poor’s to downgrade the US debt rating by one notch.

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