Debt ceiling: Washington is grappling with “hard choices” if no deal is reached by June 1

Washington publicly charts what the world could look like on June 1 if no deal is reached on the debt ceiling.

The immediate economic effects of the first real default in American history are far from clear. It is being discussed as negotiators remain divided on a range of issues.

Time is running out to seal a deal and then turn it into law before the key deadline of just 10 days. President Joe Biden and House Speaker Kevin McCarthy meet Monday at 5:30 p.m. ET for another round of talks.

Treasury Secretary Janet Yellen insists an agreement must be reached and “it is an unacceptable situation for us not to be able to pay our bills”.

She said Sunday on NBC’s Meet the Press that her first priorities if there is no deal by June 1 would include paying interest on existing debt as well as making sure Social Security recipients and military employees get their checks on time.

“There will be hard choices to make about the bills that won’t be paid” if the talks fail or are too slow.

But there is a view in Washington among some Republican lawmakers that the economic turmoil can be limited initially. That was echoed on Monday by Strategas Securities managing director Janet Lowe, who said Yellen’s approach could mean June 1 “won’t actually be a default.”

If June 1 arrives without a deal, Lowe said, the government “may be withholding payments to government contractors and that’s where you might see risks,” especially for companies related to sectors like defense and healthcare.

Stifel, senior Washington policy strategist Brian Gardner agrees with this view, noting the “caveat that none of this has been tested.”

He said in a separate interview that there is a chance that “Date X” on or around June 1 could arrive without an agreement and “we may not get the buzz that everyone expects” if politically and economically vital groups such as bondholders and Social Security recipients and individuals do not see Army no immediate outage.

All bets are off, of course, with a long-term default. The White House said that would lead to a severe recession and the stock market to drop 45%.

The GOP doubts the June 1 deadline

The debate over the short-term effects comes after negotiations in Washington stalled for extended periods over the weekend with both sides calling the other side unreasonable.

The negotiations were revived by a phone call Sunday between Biden and McCarthy, but the dynamic is complicated by growing discontent on both the right and left sides.

Biden tried to strike an optimistic tone late Sunday night, telling reporters as he flew back from Asia that he watched the latest round of negotiations and “it went well.”

House Speaker Kevin McCarthy (R-Calif.) and President Joe Biden in the Oval Office on May 9 (Anna Moneymaker/Getty Images)

The idea that June 1 might not be as hard a deadline as many feared has also been echoed by some Republicans, including one moderate.

“There is such a thing as a non-technical default,” Rep. Brian Fitzpatrick (R-PA) said on CBS’s “Face the Nation,” suggesting that the initial breach could lead to less dire economic scenarios if bondholders The US Treasury is still getting paid on time.

“The math tells us there’s a little wiggle room” to give negotiators more time to work, he added, noting quickly that US credit downgrades and market volatility remain persistent risks.

His clear preference is to reach a deal as soon as possible to cancel the default.

Some bills have to go unpaid.

FILE - U.S. Treasury Secretary Janet Yellen takes questions from reporters during a news conference, at the Group of Seven meeting of finance ministers and central bank governors, at Toki Messe in Niigata, Japan, Thursday, May 11, 2023. (AP Photo/Shuji Kajiyama, pool, file)

Treasury Secretary Janet Yellen discusses the debt ceiling on May 11. (AP Photo/Shuji Kajiyama)

Analysts at the Bipartisan Policy Center recently compiled a list of key government payments that could be at risk in early June, including $47 billion in Medicare payments due June 1 followed by $25 billion in Social Security checks scheduled for June 2.

These payments are just a few of the billions upon billions that flow out of the Treasury every day to pay for things like veterans benefits, federal salaries, tax refunds, Medicare, government contractors and more.

Shay Akabas, the group’s director of economic policy, warned in a recent press briefing that no matter what policymakers expect, things can get unpredictable very quickly if the X-date is breached.

“The steps that we could see in the aftermath of a date X crossing or some other extraordinary circumstance that occur I think will quickly be taken out of the hands of policy makers and put into the hands of market participants, investors, businesses and individuals,” he said.

Gardner also laid out in a conversation on Monday the myriad ways you can get to an X-date sideways quickly. There are questions about whether the Treasury Department’s regulations will be halted, and how investors will react in the face of an unprecedented default.

But if it comes down to it, he said, “the level of political pressure will depend on who is not getting paid.”

Ben Werschkull is Yahoo Finance’s Washington correspondent.

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