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This report does not constitute a rating action.
S&P Global Ratings is monitoring developments regarding the U.S. debt ceiling--and the potential implications for the U.S. sovereign credit rating--and addressing frequently asked questions on this topic. Our sovereign credit ratings on the U.S. are AA+/Stable/A-1+.
On Jan. 13, the U.S. Treasury informed Congress that on Jan. 19 the U.S. sovereign debt level would hit the statutory limit established by law. In addition, the Secretary of the Treasury informed Congress that starting Jan. 19, the Treasury would start implementing "extraordinary measures" to continue fulfilling all its legal obligations, including payments on sovereign debt. The Treasury estimates that the use of extraordinary measures will likely provide enough resources for the government to meet its obligations until early June--giving limited time for Congress to either raise the debt ceiling or suspend it.
We expect that Congress will engage in brinksmanship with the debt ceiling but will address it on time, either raising it or suspending it, understanding the severe consequences on financial markets and the global economy of not doing so.
Frequently Asked Questions
What is the debt ceiling?
The debt ceiling is the total amount of money the U.S. government is authorized to borrow to meet existing legal obligations. Such obligations include both mandatory and already appropriated discretionary spending, including social security and Medicare benefits, salaries, interest on debt, and tax refunds. The debt limit does not authorize new spending commitments but provides approval for issuing debt to meet existing legal obligations made by the U.S. government.
Who approves the debt ceiling?
Under the Constitution, Congress has the power to authorize the U.S. government to issue debt based on the credit of the U.S. Until 1917, Congress approved the issuance of individual debt securities and sometimes, during war time, gave approval to the Treasury to roll over short-term debt (with a cap on the outstanding amount of such debt). In 1917, Congress authorized the Treasury to issue debt without necessarily tying the proceeds of an issue to a specific project, giving the Treasury greater discretion to manage the maturity of its debt and improve its debt service profile. In 1939, Congress moved toward setting an aggregate debt limit, creating the current legal framework for sovereign debt management.
Has Congress always approved an increase in the debt ceiling?
Congress has raised the debt ceiling on time on over 80 occasions since 1960. This has occurred during both Republican and Democratic Congresses/administrations. Many of the debt ceiling changes have been agreed in conjunction with major fiscal legislation used as a negotiation tool. During the last 12 years, Congress has passed legislation (and the president has signed it) to raise or suspend the debt ceiling on seven occasions (in 2011, 2013, 2017, 2018, 2019, and twice in 2021) following an impasse on the debt limit.
What happened the last time the debt ceiling came into question?
The debt ceiling had been suspended from August 2019 until the end of July 2021 and was reinstated at the level of outstanding debt on Aug. 1, 2021, as Congress failed to either raise the ceiling or extend its suspension. Subsequently, the U.S. Treasury undertook "extraordinary measures" that allowed it to service sovereign debt in full and on time while keeping debt below the ceiling. On Oct. 14, 2021, President Joe Biden signed legislation to raise the government's debt ceiling by $480 billion (to reach $28.9 trillion), a very limited increase. The Treasury resumed issuing debt but reached the new ceiling by the end of October and again started undertaking extraordinary measures to allow it to service its debt. On Dec. 16, 2021, the president signed a law that raised the debt ceiling to approximately $31.38 trillion (an increase of $2.5 trillion).
What happens when the government's debt reaches the ceiling?
Historically, the Treasury has ceased to issue new debt in the market and has used "extraordinary measures" to avoid defaulting on debt and on other government obligations. Such measures largely rely on borrowing through various means from government accounts, including public-sector retirement funds. Once the president signs a new debt ceiling into law, the Treasury can start to unwind the extraordinary measures and repay the money it borrowed from government accounts by issuing new debt.
What is the economic and political context for the debt ceiling impasse?
Following the 2022 midterm elections, Congress is even more divided than before. The Republicans now have a slim majority in the House and the Democrats in the Senate, setting the stage for what we anticipate will be a highly partisan political debate over the debt ceiling. The Treasury announced this week that it might exhaust its room for maneuver from undertaking "extraordinary measures" after early June. This gives Congress roughly five months to address the issue, longer than the timeline associated with previous debt-ceiling impasses. Given the current political dynamics in Congress, we anticipate that there is likely to be protracted debate before the issue is resolved.
Some analysts had estimated that the Treasury would have reached the current debt ceiling later in 2023, not in mid-January. However, the announcement of that date in January does, in our view, illustrate the impact of recently higher borrowing costs (reflecting higher inflation and interest rates) on the overall cash flows of the government, among other things.
What happens if there is no resolution to the debt ceiling impasse and the Treasury exhausts all "extraordinary measures"? Does that result in a sovereign default?
Such a scenario might have credit rating implications but may not necessarily result in a default.
There is a date at which the Treasury has no more space to deploy extraordinary measures and maneuver to remain under the debt ceiling. At that time, the Treasury would have exhausted its borrowing authority and not have sufficient funds to pay all its bills and legal obligations in full and on time.
Reaching such a date is not necessarily an event of default or the equivalent of missing a debt service payment. Default occurs when a payment of a security is missed (according to our ratings definitions and criteria). After a default is cured, we would assign a new rating based on our assessment of the new circ*mstances.
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As an expert with a comprehensive understanding of financial markets, sovereign debt dynamics, and credit rating processes, let me shed light on the key concepts discussed in the provided article on S&P Global Ratings' monitoring of the U.S. debt ceiling.
1. U.S. Sovereign Credit Rating:
- The U.S. sovereign credit rating, currently at AA+/Stable/A-1+, reflects S&P Global Ratings' assessment of the creditworthiness of the United States government. This rating influences investors' perceptions of the risk associated with investing in U.S. government debt.
2. Debt Ceiling:
- The debt ceiling is the maximum amount of money that the U.S. government is authorized to borrow to meet its existing legal obligations. It encompasses mandatory and already appropriated discretionary spending, such as social security, Medicare benefits, salaries, interest on debt, and tax refunds.
3. Congressional Approval of Debt Ceiling:
- Under the Constitution, Congress has the authority to approve the U.S. government's issuance of debt based on its credit. The article outlines the historical evolution of the debt ceiling approval process, highlighting changes made in 1917 and 1939, which established the current legal framework for sovereign debt management.
4. Historical Debt Ceiling Changes:
- The article provides a historical perspective, noting that Congress has raised the debt ceiling over 80 times since 1960, occurring under both Republican and Democratic administrations. The debt ceiling has been adjusted in conjunction with major fiscal legislation.
5. Extraordinary Measures:
- When the government approaches the debt ceiling, the Treasury employs "extraordinary measures" to continue meeting its obligations without defaulting. These measures involve borrowing from various government accounts, including public-sector retirement funds, until the debt ceiling is increased or suspended.
6. Economic and Political Context:
- The current economic and political context is discussed, emphasizing the heightened division in Congress following the 2022 midterm elections. The article anticipates a partisan debate over the debt ceiling, with the Treasury expected to exhaust its maneuvering room from extraordinary measures by early June.
7. Consequences of No Resolution:
- The article explores the potential consequences if there's no resolution to the debt ceiling impasse, emphasizing that while it may have credit rating implications, it may not necessarily result in a default. It clarifies that default occurs when a payment of a security is missed.
8. Credit Rating Implications:
- The expert analysis suggests that a failure to address the debt ceiling may have credit rating implications, but it may not immediately lead to a sovereign default. S&P Global Ratings would reassess the situation after a default and assign a new rating based on the new circ*mstances.
9. Analyst Contact Information:
- The article includes contact information for primary and secondary credit analysts at S&P Global Ratings, reinforcing the credibility and transparency of their assessments.
In summary, the article provides a detailed overview of the U.S. debt ceiling, historical context, potential consequences, and S&P Global Ratings' perspective, demonstrating a nuanced understanding of the complex interplay between fiscal policy, financial markets, and sovereign credit dynamics.
