If you hold debt, you expect to be paid back and receive interest payments. The market for U.S. government borrowing is an enormous part of the financial system, and many other financial instruments are priced off U.S. Treasuries as the so-called ‘risk-free’ asset. Hitting the debt ceiling first hinders, and then ultimately blocks, the U.S. government’s ability to pay interest and raise new debt.
If the government fails to pay interest on the national debt, that has broad repercussions for financial markets. Failing to pay interest is something more common to struggling companies facing bankruptcy than the U.S. government.The U.S. government came within days of debt default in August 2011, causing its debt to be downgraded. This prompted a sell-off in the stock market too.
Of course, it’s no coincidence that the 2011 debt ceiling issues came after the Republicans won control of the House and Senate in the 2010 midterms under a Democratic Presidency, leading to political gridlock. Though the Democrats have kept the Senate this time around, Republicans have taken the House. That could lead to similar political gridlock in 2023. Importantly, debt ceiling negotiations are likely to be a key point of leverage for Republicans.
Arguably since the events of 2011, the risk of debt ceiling negotiations is now a little more ‘priced in’ to financial markets, and perhaps better understood by politicians. It seems likely a compromise can be found to raise the debt ceiling. Also, we should note that many debt ceiling debates have passed since 2011 with similar levels of concern, but less ultimate market impact. However, the debt ceiling risk may weigh on markets in 2023, and a positive outcome can’t be guaranteed.
Why do we even have a debt ceiling when it’s raised EVERY SINGLE TIME
Good.
Remove the filibuster for debt ceiling votes in the lame duck. Let's put an end to this nonsense once and for all.