United States: Consequences of Failing to Lift the Debt Ceiling

In this commentary we discuss the potential consequences of Congress failing to lift the debt ceiling in a timely manner. We assume in this analysis that the polarized political atmosphere delays passage of the debt ceiling well into the summer months. If this were to be the case, we take the view that the consequences for the U.S. economy and financial system would be highly negative – and significantly worse and longer-lasting if the Treasury misses any debt payments.

Key highlights include:

-- If Congress fails to lift the debt ceiling, the federal government will not be able to pay all of its obligations on time.

-- Prioritizing debt servicing payments could delay a default but would still have a negative effect on the U.S. economy and could quickly run into other challenges.

-- If the U.S. Treasury misses a debt payment, the damage to the U.S. economy and financial system could be significantly higher and longer lasting.

“If the debt ceiling is not raised in a timely manner, the best one could hope for is that the Treasury prioritizes debt payments and the U.S. experiences a brief recession,” notes Michael Heydt, Senior Vice President, Global Sovereign Ratings. “A prolonged delay would likely lead to something far worse.”