(Bloomberg) — A financial-market shock is what’s required to motivate politicians to break the current impasse on the US debt ceiling, according to former Biden administration economic adviser Daleep Singh.
“I’m afraid market stress is still what’s needed to create cover for facing compromise and that’s why, perversely, market complacency is tough to beat,” Singh, now chief global economist for PGIM Fixed Income, said during an interview on Bloomberg Television Monday.
Concerns about the debt ceiling have ramped up in the past week after Treasury Secretary Janet Yellen and the non-partisan Congressional Budget Office warned that the government risks running out of headroom under the $31.4 trillion statutory borrowing limit as soon as early June.
Treasury-bill markets have started to factor in the risks of non-payment, while the cost of insuring against a US default through derivatives has risen — but the broader market impact of debt-cap concerns has remained relatively muted.
Stocks and bonds have been moved more by the ongoing banking crisis, concerns about recession and changing expectations for Federal Reserve monetary policy.
As the deadline for the debt ceiling draws closer, though, that could change. If default fears become a top-rank concern, there’s potential for them to roil markets like they did in 2011 and other debt-cap episodes, or perhaps inflict even more damage.
In the meantime, President Joe Biden is set to host House Speaker Kevin McCarthy and other congressional leaders at the White House on Tuesday in an attempt to bridge the gap between Democrats and Republicans. For his part, McCarthy is seeking to implement spending cuts as a condition of suspending or raising the debt limit, while Biden has said that spending should be a separate issue from increasing the debt limit.
“I’d be surprised if we got a decisive breakthrough” at the Tuesday meeting, said Singh, who was previously deputy national security advisor for international economics and deputy director of the National Economic Council. “The incentives are not just yet in place.”
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