Biden 'Confident' on Reaching Debt Deal as GOP Bashes Japan Trip
Comment of the Day

May 17 2023

Commentary by Eoin Treacy

Biden 'Confident' on Reaching Debt Deal as GOP Bashes Japan Trip

This article from Bloomberg may be of interest. Here is a section:  

President Joe Biden expressed confidence that negotiators would reach an agreement to avoid a catastrophic default, even as House Speaker Kevin McCarthy criticized his decision to travel to Japan for an international summit.

“I’m confident that we’ll get the agreement on the budget and that America will not default,” Biden said Wednesday at the White House, shortly before departing to Hiroshima, Japan for a Group of Seven leaders summit.

On Capitol Hill, McCarthy and other Republican lawmakers criticized Biden for his decision to travel, with the House speaker labeling the president “a big obstacle” to an agreement.

“Mr. President, stop hiding, stop traveling,” McCarthy said.

On Tuesday, Biden and congressional leaders agreed to a new narrower round of staff-level talks with hopes of reaching a bipartisan deal to avoid an unprecedented US default. The US president also announced he was canceling planned stops in Australia and Papua New Guinea, and would return to Washington by the beginning of next week for continued negotiations.

Eoin Treacy's view

The decision to attend the G7 meeting is a clear signal there are more important issues at stake than the inward facing decision about how spending and taxing priorities are apportioned. Holding the sovereign debt market to ransom is not the most productive use of anyone’s time but at least it ensures there is a discussion about the trajectory and sustainability of the national debt and obligations.

The current situation with the debt ceiling is not the same thing as the inability to pass a budget which shut down the government in early 2019. That’s well understood by politicians. Kevin McCarthy needs a deal he can take back to the fiscal conservatives he is beholden to. At the same time, those same people will be under pressure to ensure the country does not default on its sovereign debt.
CDS on US debt hit a peak of 175 basis points yesterday and today’s downward dynamic suggests the peak of hedging activity has been reached.

That has also enhanced risk appetite and contributed to the strength on Wall Street today.

There is scant potential for a deal on true fiscal probity, but the question of student loan debt forgiveness could easily find its way into the discussion. Forbearance is due to end in a couple of months and several million people will need to begin making payments again. That is something that will improve the outlook for government debt and could be repackaged as savings to boost the debt ceiling.

10-year yields are firming on improving chances a deal will be struck. That virtually ensures additional new supply will be issued. It’s worth considering this is happening when the economy is still expanding. Gold continues to hold in the region of the round $2000 because traders are hedging the potential for liquidity to ramp higher when a recession begins. 

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