3. THIS MONTH’S SPOTLIGHT: THE US DEBT CEILING
The US was on the verge of running out of money in May due to a standoff between the White House and Congress over borrowing limits. The debt ceiling reached its limit of $31.4 trillion in January. If the debt limit wasn’t raised, the government would’ve had to prioritise the payment of its bills.
We understand that while political events may create short-term market noise, their long-term impact is typically limited. So, while the US debt ceiling has been hitting the headlines, we’ve seen nothing to change our market assessment. The US has never defaulted on its payments before, with past debt ceiling battles typically ending with a hastily arranged agreement in the final hours.
According to the US Treasury, since 1960, the US government has raised or altered the debt ceiling 78 times. In 1995 and 1996, clashes over federal spending between the Republican-controlled Congress and President Bill Clinton resulted in the government being partially shut down twice for a total of 26 days which didn’t trigger a default on US debt. There was also a stalemate between President Barack Obama and the Republicans in Congress in 2011, but an agreement was reached to raise the debt ceiling in the final days.
Howard says: “Past debt ceiling standoffs have tended to have a more significant political impact rather than financial impact. For instance, during the 1995–96 clash, there wasn’t any noticeable effect on financial markets despite the uncertainty. During the 2011 debt ceiling discussions, markets temporarily dipped after the US credit rating was downgraded, but soon rebounded after a resolution was reached.”
However in this instance, the Republicans, who have a majority in the House, initially refused to raise the debt ceiling unless President Biden and the Democrats agreed to spending cuts. Negotiators from Democratic and Republican parties reached an agreement to raise the debt ceiling at the end of May, which was cleared by Congress shortly after.