A debt ceiling breach may be upon us … but hopefully it is not.
Depending on how negotiations play out in the next few days, the United States could blow past June 5, Treasury Secretary Janet Yellen’s latest projection for the deadline when the country is no longer able to pay all its bills. That date, otherwise known in policy parlance as the “X-date,” is one that Yellen cited again this week as the point when the US could potentially run out of money.
While there’s some uncertainty around whether June 5 is a hard-and-fast deadline, it’s still not the best sign if lawmakers don’t manage to get an agreement by then. And even if Democrats and Republicans secure a deal, they’ll still have to write and pass legislation with just a few days to go.
As the 2011 debt ceiling standoff made clear, getting close to an X-date can rattle the markets and even result in the US’s credit rating getting downgraded, which could make it more expensive for the government to borrow money. Congress’s willingness to get so close to an actual default also ratchets up the uncertainty around whether the country can keep on meeting its obligations, and if this could be the time that it actually goes over the edge.
What is the so-called “X-date” and why does it matter?
The X-date is when things start to get real and the US is no longer able to meet its financial obligations. It’s when Treasury Secretary Yellen runs out of rabbits to pull out of her hat — basically accounting tricks also known as “extraordinary measures” — to keep paying the country’s bills. We don’t know when exactly X-date is, but it could be as soon as June 5 (though some say it’s sometime in August). It matters because that’s the deadline here, the point when havoc could ensue.
Yellen and others have noted that the June 5 date is a projection at this point. It’s “an estimate depending on the flow of revenue and outlays on a daily basis, but it is subject to a tremendous amount of uncertainty,” says EY-Parthenon chief economist Gregory Daco.
Because of the questions regarding exact federal revenues and outlays, it’s possible that the US could cover some of its costs beyond June 5, though experts caution against pushing the deadline and trying to find out. The Bipartisan Policy Center has also noted that the risk of the country not being able to pay its bills goes up between June 2 and June 13, but that the US could get an influx of tax revenue on June 15 that could help tide the country over for longer.
Additionally, many economic experts still believe there will be a deal by June 5 and that lawmakers will be able to pass a bill by that time. Congress will have to navigate some procedural hurdles and party infighting to do so — House rules require that members get 72 hours to review any legislative text before approving it — but lawmakers have had a history of going down to the wire on such bills and managing to get them done. (In the past former House Speaker Nancy Pelosi has waived the 72-hour rule at times, though House Speaker Kevin McCarthy has said he’ll stick by it.)
What actually happens if there’s no deal to raise the debt ceiling by the X-date?
If there’s no deal and Treasury seriously has no money to pay its bills, then it starts missing payments. It’s not clear which payments those are. Yellen has said the department’s systems aren’t built to prioritize certain payments over others, which would mean bills would be missed as they come. But many experts say there are certain bills the US really, really would not want to forego, such as interest payments on its debt, and that Treasury and the Federal Reserve would very likely find a way to keep up.
If the X-date lands and there’s no deal, the hope is that a deal would happen fast as the fallout from a debt ceiling breach takes shape. The longer the country goes without a deal and continues to miss payments, the worse the economic landscape will become.
What happens if America’s credit rating gets downgraded?
The uncertainty around the debt limit debacle could lead to the downgrading of the US’s credit rating, a move that could prove problematic for the country even if it doesn’t default.
In 2011, due to concerns about the partisan turmoil that was created by the debt ceiling fight, Standard & Poor’s downgraded the US’s credit from AAA to AA+. This year, all eyes are on S&P, and Moody’s and Fitch, the two other major ratings agencies. Fitch has already signaled that it’s weighing a downgrade, which has only raised lawmakers’ concerns while the country waits on an agreement.
The country’s credit rating, much like an individual’s credit score, speaks to how reliable the US is at paying back its debts. Historically, US assets have been seen as the most secure and risk-free in the world, and a downgrade in its rating would affect that perception.
Beyond impacting how the US is viewed globally, a rating downgrade could also make it more expensive for the country to borrow money in the future since it’s considered a riskier investment. “A downgrade of the country’s credit rating could quickly increase borrowing costs for the government, and therefore American taxpayers, as investors demand a higher rate of return on Treasury securities,” says Bipartisan Policy Center economic policy director Rachel Snyderman.
What are the economic costs of all this chaos? How bad could it get?
It’s not good! Because the US has never intentionally defaulted on its debt before, we don’t really know what it means for the economy in the event that it does. However, none of the scenarios are good.
“A number of different scenarios are possible, with the implications for the US economy ranging from bad to dire,” wrote Megan Greene, chief global economist at Kroll, in a recent analysis. “Depending on how long the situation lasts, how it is managed and how investors react, there is enormous uncertainty about the damage that might be wrought if the debt ceiling binds.”
In 2011, just the brinksmanship over the debt ceiling led to a $2.4 trillion decline in household wealth.
It all depends on what the Treasury decides to do if and when the debt ceiling is breached. Most experts say it would find a way to keep paying interest on its debt, because not doing so would be a complete disaster, so it would start missing payments elsewhere — on Medicare, Social Security, and government workers, for example. That would have consequences for those immediately affected and knock-on effects as well, but the bigger problem is likely to be the panic over the uncertainty. That could translate to market chaos, rising interest rates, and a host of negative economic effects.
When will the US have to deal with all of this again?
If this whole situation feels like déjà vu, that’s because it is.
The US has to raise or suspend its debt ceiling every few years as its debts have increased over time. For some context here, Congress has raised, revised, or extended the debt ceiling nearly 80 times since 1960.
This time around, Democrats have urged a large enough increase to the debt ceiling that will ensure that Congress doesn’t have to deal with this debate again before the 2024 election, a demand a potential compromise looks likely to address. That means lawmakers will raise the debt ceiling enough so that this won’t be a problem until after November 2024, which would be neat, because this whole thing is kind of exhausting.
Update, 4:40 pm ET: This story has been updated to include Treasury Secretary Janet Yellen’s latest estimate of the “X date.”