Probability of a catastrophic US debt default has risen 300% since January: report

by Chris Lange

Chris Lange, FISM News

The probability of a catastrophic U.S. debt default has risen by 300% since the beginning of the year, according to a report by American financial services provider MSCI.

“Implied default probabilities have increased to levels not seen since the 2013 debt-ceiling debate,” MSCI reported, warning that Congress must quickly pass a spending bill to avoid a fiscal crisis.

MSCI researchers said that the likelihood of a U.S. debt default had risen from 3.3% at the beginning of January to 11.3% as of March 2, the date on which it released the report.

The U.S. reached its $31.4 trillion borrowing limit on Jan. 19.

Treasury Secretary Janet Yellen said in September that the Department had been operating under “extraordinary measures” to pay for U.S. commitments since July 31, 2023, when the debt ceiling suspension expired. In a warning letter to Congress, Yellen said that all maneuvering tactics to free up additional money currently in place would dry up in October 2022.

The Treasury Secretary noted in the missive that the “extraordinary measures” to which she referred included “a suspension of certain investments in the Civil Service Retirement and Disability Fund, the Postal Service Retiree Health Benefits Fund, and the Government Securities Investment Fund of the Federal Employees’ Retirement System Thrift Savings Plan.”

She went on to warn: “Once all available measures and cash on hand are fully exhausted, the United States of America would be unable to meet its obligations for the first time in our history.”

Despite the dire warning, and amid negotiation attempts that have yielded little progress, Democrats and Republicans remain at loggerheads over raising the debt ceiling. House Speaker Kevin McCarthy (R-Calif.) has maintained a hardline position that House Republicans won’t agree to increased spending unless Democrats acquiesce to their demand for corresponding budget cuts.

The term is a nonstarter among many Democrats, including President Joe Biden, who have claimed that Republicans want to exploit the debt ceiling crisis to gut Medicare and Social Security. In-party divisions have also emerged. Senate Minority Leader Mitch McConnell said in late January that he is in favor of raising the debt ceiling, regardless of spending cuts.

McCarthy said in February that “defaulting on our debt is not an option. But neither is a future of higher taxes, higher interest rates, and an economy that doesn’t work for working Americans.”

MSCI cautioned that if Congress fails to reach an agreement to increase spending, “the U.S. government’s ability to borrow may be exhausted sometime between July and September.”

One indicator of trouble on the horizon cited by MSCI is a marked uptick in trading activity in credit default swaps (CDS) for U.S. government one-year debt since January, with wary investors buying insurance amid heightened fears of a fiscal disaster.

“Legal arguments have been made that the U.S. Constitution does not allow the government to default on its debt obligations. Nevertheless, a noteworthy pick-up in trading activity in credit-default swaps (CDS) indicates that some market participants challenge this view,” the report states.

MSCI concluded that, without Congressional approval to lift the debt ceiling, “CDS trading volume on the U.S. government may continue to strengthen as summer approaches, and the possibility of missing payments on U.S. Treasurys looms larger.”

The researchers warned that “the consequences of a potential default by the U.S. government extend beyond the immediate impact on holders of Treasurys. Major market dislocation and a sharp slowdown in economic activity could both be realistic possibilities.”

This article was partially informed by an Epoch Times report.