WEF 2023: US debt crisis clouds Davos optimism on global economy read full article at worldnews365.me

The global financial elite gathering in Davos, Switzerland, this week warned of the dangers stemming from the looming US federal debt-limit fight, a potential crisis that overshadowed any cheer from a reopening of China’s economy and diminishing recession risks in Europe.

“The idea that we’re even talking about this after what we’ve seen in the past, to me, is very disappointing,” Ronald O’Hanley, chief executive officer of State Street Corp., told Bloomberg Television in . “This is not the way a political fight should occur. Markets haven’t priced it in.”

More than a decade after one debt-ceiling standoff led to a sovereign US rating downgrade, financial-market turmoil and a weakened economic recovery, political battle lines are again being drawn.

House Speaker Kevin McCarthy and fellow House Republicans haven’t grasped the economic and financial impact posed by a default, or their proposed payment-prioritization plan, according to Wall Street executives with Republican ties. Under prioritization, Congress could order the Treasury to keep paying interest and principal on government debt, while delaying other payments, an idea the department has rejected in the past as unfeasible.

Two of the executives said they are in regular contact with congressional leadership in the hopes they can persuade lawmakers to secure the long-term health of the nation’s credit and set personal political ambition aside. Both spoke on the condition of anonymity.

McCarthy on Tuesday called for talks with President Joe Biden and congressional Democrats over a fiscal plan that would include lifting the limit. The White House reiterated its rejection of such negotiations, urging a “clean” increase in the limit as bipartisan lawmakers have done in the recent past.

With the US Treasury facing the risk of running out of cash after early June, there’s no sign yet of any potential for compromise. Failure would see a US payments default that Treasury Secretary Janet Yellen has warned would be devastating for the economy.

Back in 2011, President Barack Obama eventually agreed with Republicans on a spending plan in return for boosting the debt limit. Many economists blame that fiscal austerity for undermining the rebound from the global financial crisis.

“Our politics are more difficult and fractured than 2011,” raising the stakes today, Senator Chris Coons, a Democrat from Delaware and ally of Biden, said Wednesday on the sidelines of the in . “The margin for error is very small.”

Global Stakes

Stakes go beyond just the US, which is already facing elevated recession risks in the wake of the most aggressive monetary-tightening campaign by the Federal Reserve since the early 1980s.

“This shouldn’t be an additional risk that the US or the world should have to deal with,” said Gita Gopinath, the No. 2 official at the International Monetary Fund, speaking on Bloomberg TV.

Yellen notified congressional leaders last week that the Treasury will start deploying extraordinary accounting steps on Jan. 19 to avoid running out of cash. She said while it’s impossible to specify now when those measures will be exhausted, it’s unlikely to be before early June.

One of her predecessors, Lawrence Summers, on Wednesday in echoed her warnings about damage from any payments default.

“This is potential tragedy as farce — it would be catastrophic and incomprehensible for the United States to default,” Summers told Bloomberg Television’s Wall Street Week with David Westin. Summers is a paid contributor to Bloomberg TV.

Congressional Republicans are demanding deep spending cuts as the price for raising the current limit of nearly $31.4 trillion. Democrats are determined to safeguard programs including Social Security and Medicare, and the raft of social and climate investments enacted in legislative wins earlier in the Biden administration.

Lawmakers have traditionally used “the debt ceiling to make a point,” Blackstone Group Inc. Chief Executive Officer Stephen Schwarzman said on Bloomberg TV. “The point from the Republican side is that we’re spending too much money.”

But even getting close to a default has a “variety of bad effects,” he warned.

–With assistance from Ben Bartenstein and Madison Mills.

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