Debt-ceiling standoff: Here's what's next as Democrats and Republicans warn about U.S. default

By Victor Reklaitis

One analyst is eyeing 'June and July for more concerted bipartisan negotiations,' and expects 'the showdown will probably go until the 11th hour before a messy resolution'

While a divided Washington has made little progress in raising the U.S. debt limit so far this year, there will be an endgame at some point.

But when could that hit, and what are the steps to get there?

Here's what looks likely to come next.

Republican-led House aims to vote on proposal in a matter of weeks

In a speech Monday at the New York Stock Exchange, House Speaker Kevin McCarthy said his chamber will vote "in the coming weeks" on legislation that would suspend the limit on federal borrowing for a year, while returning federal spending to 2022 fiscal-year levels and limiting the growth of outlays over the next 10 years to 1%.

McCarthy and his fellow Republicans have demanded spending cuts in exchange for raising the ceiling for federal borrowing, while President Joe Biden and his fellow Democrats have said the lift should be made without conditions.

During his remarks at the NYSE, the speaker reiterated his call for Biden to negotiate on the debt limit, saying: "The longer President Biden waits to be sensible, to find an agreement, the more likely it becomes that this administration will bumble into the first default in our nation's history."

But top Democrats have not sounded won over at all, with Senate Majority Leader Chuck Schumer saying on Monday afternoon that McCarthy is continuing to "bumble our country towards a catastrophic default."

On Wednesday, McCarthy and other top House Republicans released their debt-limit bill, dubbed the Limit, Save, Grow Act, saying it "will limit federal spending, save taxpayers trillions of dollars, grow our economy, and lift the debt limit into next year."

Biden criticized the House GOP's approach in a speech on Wednesday at a union hall in Maryland, saying it's "about cutting benefits for folks they don't seem to care much about."

Read more:McCarthy's plan would raise debt ceiling by $1.5 trillion, but include sweeping budget cuts

Fresh estimate for 'X date' to drive talks

The Bipartisan Policy Center estimated in February that the "X date" -- the day when the government can't meet all obligations -- likely will arrive in the summer or early fall, with the exact timing depending heavily on 2022 tax collections that are hitting their peak this month.

So there could be a better estimate for the X date in late April, following the filing of tens of millions of tax returns.

"The White House is now saying they expect to have an updated estimate of the 'X date' about a week after Tax Day on 4/18," said Tobin Marcus, senior U.S. policy and politics strategist at Evercore ISI, in a note.

"This will be a big catalyst to prompt more activity in D.C., as Congress can only really function with looming deadlines, and the updated estimate will drive a lot of headlines," Marcus added. "Our best guess prior to this update is that the X Date will probably land in July."

Related:Debt-ceiling deadline may come faster than expected, Goldman says

And see: Why was Tax Day on April 18 this year -- and not April 15?

June could be when markets tune in before a 'messy' resolution

Marcus said if the X date ends up being in July, Evercore "would expect D.C. activity to start to pick up in May, with markets tuning in more in June as urgency in D.C. starts to crank up further."

He sees "little if any overt negotiation going on" until after the GOP-run House succeeds or fails at passing its proposal.

"This leaves June and July for more concerted bipartisan negotiations. We continue to believe the showdown will probably go until the 11th hour before a messy resolution," he said.

Marcus also said Evercore is "skeptical of the buzz that the two sides mightagree to a short-term extension of the debt-ceiling deadline to align with the end of the fiscal year on Sep. 30."

Meanwhile, 22V Research's Kim Wallace said this year's standoff over the debt limit is likely to weigh on markets, but there are "very, very low odds of default" and "worst-case outcomes."

"My guess is that sometime beginning Memorial Day the parties will begin to circle around each other and eventually negotiations will be engaged on fiscal year '24," said Wallace, 22V's head of Washington policy research, in a recent interview with MarketWatch.

"The question will remain, and it will vex markets and anyone else who pays attention between now and late summer or fourth quarter," he added. "It will vex you in terms of the process and how they get there, but very much more than likely they'll get there. It'll be loud, messy, probably displeasing for most stakeholders and participants, but they'll get there."

See:U.S. debt-ceiling brinkmanship threatens market calm after bout of 'intense volatility' on bank fears

Other House proposal for the debt limit

Beyond the proposal from McCarthy, other lawmakers have floated plans related to the debt ceiling.

The bipartisan House Problem Solvers Caucus on Wednesday proposed suspending the borrowing limit through Dec. 31. That group's plan also calls for setting up an independent fiscal commission and "deficit-stabilization controls" as well as adopting budget reforms, according to a news release.

Meanwhile, members of the House Freedom Caucus, a conservative Republican group, have pushed for linking a debt-limit hike to repealing parts of the Inflation Reduction Act -- which was the Democratic climate and healthcare package that became law last year -- such as its green tax credits and its funding boost for the Internal Revenue Service.

Those repeals were included in the GOP debt-limit bill unveiled Wednesday, as top Republicans need Freedom Caucus votes due to their party's slim majority in the House.

Why stocks plunged in 2011 after that year's debt-limit standoff

This past January, the Treasury Department said it had started to use "extraordinary measures" because the federal government was running up against its ceiling for borrowing.

When the government reaches that ceiling, it can't increase its outstanding debt and can only draw from cash on hand, spend incoming revenues and take those so-called extraordinary measures, White House economists noted in a blog post in 2021 -- amid an earlier standoff over the limit.

"While the United States has hit the debt limit before, it has never run out of resources and failed to meet its financial obligations," the economists added.

But the country got close a dozen years ago. In August 2011, lawmakers approved an increase to the debt limit just hours before a potential government default. Within days, the U.S. then lost its triple-A debt rating from Standard & Poor's for the first time in history, with the credit-rating agency saying the American political system had become less stable.

Stocks plunged in August 2011 following that downgrade from S&P.

Why the U.S. government has a debt limit

Congress for more than a century used to authorize each sale of Treasury bonds to pay for specific projects, but U.S. lawmakers gave the Treasury Department more flexibility on the country's debt in 1917, as officials faced the onset of World War I and a federal government that was growing in size.

Then, just before World War II, Congress gave the Treasury almost unlimited power to decide what securities to sell and how to best manage the nation's debt -- subject to an overall limit.

Ever since then, Washington has produced many battles over raising the limit on federal borrowing to pay for spending already approved by Congress and presidential administrations, with both Republican and Democratic presidents having to cajole reluctant lawmakers, as MarketWatch has previously reported.

A New York Times editorial in the 1980s complained that "the fight to raise the debt ceiling is a periodic ritual on Capitol Hill, and every battle is surrounded by predictions of fiscal ruin."

See: Fights over debt limit have long history

-Victor Reklaitis

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04-19-23 1639ET

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