Risk of Debt Default Is ‘Non-Trivial,’ Warns JPMorgan

The Treasury Department building in Washington, on Jan. 19, 2023. Saul Loeb/AFP via Getty Images

JPMorgan has warned that there’s a “non-trivial risk” of a default on U.S. government obligations as the debt-limit deadline looms with no agreement in sight.

Analysts at the bank said in the Wednesday note that they expect the debate over the debt ceiling as well as the one on the federal funding bill to come “dangerously close” to their respective deadlines.

The United States reached its $31.4 trillion debt ceiling in January, leaving it to a politically divided Congress to raise the cap and allow the government to keep paying its bills.

Democrats have insisted on a bill with no preconditions to raise the debt ceiling, while Republicans have demanded spending cuts in exchange for their support to lift the borrowing cap.

X-Date

The Treasury Department has, since the January breach of the debt cap, resorted to so-called “extraordinary measures” to keep making payments on outstanding federal debt obligations and keep the government from defaulting, but these will run out at some point.

The federal government could reach the moment when it will no longer be able to meet its financial obligations—known as the X-date—as early as June 5, according to a January letter (pdf) to lawmakers from Treasury Secretary Janet Yellen.

When the X-date is reached and there’s no agreement to lift the debt cap, Treasury will be unable to issue any more bills, bonds, or notes. It could only make payments on its debt obligations from tax revenues.

Yellen is expected in the next few days to revise the X-date, which analysts have generally put at a later date than June 5, seeing it as a worst-case scenario that she presented to lawmakers in her January letter.

Treasury Secretary Janet Yellen testifies about the Biden administration's Fiscal Year 2024 federal budget proposal before the Senate Finance Committee in the Dirksen Senate Office Building on Capitol Hill in Washington, on March 16, 2023. Chip Somodevilla/Getty Images

The nonpartisan Congressional Budget Office (CBO) has projected that the X-date would fall at some point between July and September, while investment bank Goldman Sachs expects it will come at some point in June.

JPMorgan analysts said in the note Wednesday that they see the X-date coming in the middle of August.

“Signs of stress typically start in the T-bill market two to three months before the X-date given money market funds, which are large holders of T-bills, will begin to more actively advertise that they don’t hold any bills that mature over those dates,” JPMorgan analysts said in the note.

Markets have already started showing early signs that investors are stressed about a possible debt default. On Thursday, jitters over the debt ceiling deadlock in Washington sent the cost of insuring exposure to U.S. government debt to its highest level in over a decade.

Spreads on U.S. five-year credit default swaps, which are market-based measures of default risk, widened to 49 basis points, according to S&P Global Market Intelligence data. That’s more than twice the level the swaps stood at in January.

‘Bumble Into the First Default’

Both Democrats and Republicans have warned that failure to meet the country’s debt obligation would be disastrous for the economy. Yet while Republicans have pushed for Democrat commitments to cut spending in exchange for agreeing to lift the borrowing cap, President Joe Biden has so far insisted on a clean bill to raise it.

Biden said that he’s prepared to consider GOP proposals for spending cuts as part of a budget plan, but that such discussions must be separate from “prompt action on the Congress’s basic obligation to pay the nation’s bills an avoid economic catastrophe,” according to a letter from the president to House Speaker Kevin McCarthy (R-Calif.).

McCarthy said Monday in a speech at the New York Stock Exchange that unless Biden negotiates with Republicans to raise the debt cap, he would “bumble into the first default.”

President Joe Biden delivers remarks on the economy at an International Union of Operating Engineers Local 77 union training facility in Accokeek, Md., on April 19, 2023. Nathan Howard/Getty Images

Rather than negotiate with the GOP on spending cuts as part of raising the debt ceiling, Biden and his Democrat allies in Congress have demanded that Republicans make their spending-cut proposals public.

On Wednesday, House Republicans did just that, introducing legislation to raise the debt ceiling by $1.5 trillion, or until March 31, 2024, whichever comes first.

Called the Limit, Save, Grow Act of 2023, the 320-page bill calls for returning discretionary spending to 2022 levels, capping spending growth to 1 percent per year, and repealing certain tax credits. It would also cancel Biden’s student loan forgiveness program, take back unspent COVID-19 relief funds, remove barriers to increased domestic energy production, and reimpose work requirements for some participants in the food stamp program.

“If Washington wants to spend more, it will have to come together and find savings elsewhere, just like every household in America,” McCarthy said on the House floor.

“President Biden has a choice. Come to the table and stop playing partisan political games, or cover his ears, refuse to negotiate, and risk bumbling his way into the first default in our nation’s history.”

Rep. Kevin McCarthy (R-Calif.) answers questions during a press conference at the U.S. Capitol in Washington, on July 29, 2022. Win McNamee/Getty Images

‘Blueprint to Devastate’?

Biden criticized McCarthy’s announcement during a Wednesday speech on the economy in Maryland, calling the Republican bill “not a plan.”

“The House Republican proposal would cut critical programs, so-called discretionary spending, by 22 percent,” Biden said. “That would mean cutting the number of people who administer Social Security and Medicare, meaning longer wait times.”

“Higher costs for child care, significantly higher, preschool, college, higher costs for housing, especially for older Americans, people with disabilities, families with children, veterans,” Biden continued.

In a statement Thursday, White House press secretary Karine Jean-Pierre accused of McCarthy of siding with “extreme MAGA” Republicans and calling the plan a “blueprint to devastate hard-working American families.”

“MAGA House Republicans are holding the American economy hostage in order to take a hatchet to programs Americans rely on every day to make ends meet,” she said.

Biden submitted his 2024 budget proposal in March and has since asked Republicans to do the same.

Meanwhile, a bipartisan group of lawmakers known as the Problem Solvers Caucus recently released a one-page document that proposes suspending the debt ceiling until Dec. 31, establishing an independent fiscal commission, adopting deficit stabilization controls, and revising the budget process.

The caucus, which is made up of 31 Republican and 32 Democrat members of the House, has proposed this solution to the debt-ceiling deadlock if no breakthrough deal is reached.

“We’ve seen their one-pager,” the White House press secretary said during a briefing on April 19. “We have a very close and respectful relationship, a good relationship, with the Problem Solvers Caucus. I just don’t have a reaction to share at this time.”

“Our position continues to be to not negotiate over default. This is something that is the responsibility, the obligation of congressional members. They were able to do this three times in the last administration.”

Emel Akan and Reuters contributed to this report.