Goldman Sachs warns of “real risk” of America defaulting on debt

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“It seems unlikely that Congress will tackle the debt limit until the last minute, and there appears to be a significant risk that Congress will not act before the October 18 deadline,” Goldman Sachs economists wrote. in a note.

The Wall Street bank added that a “disruption in borrowing power appears to be a real risk”, even though the disruption would “likely be brief.”

Importantly, Goldman Sachs’ warning was issued ahead of the news that Senate Minority Leader Mitch McConnell is weighing two ideas for Democrats on debt containment. One option would be a short-term increase in the debt ceiling, a Republican source told CNN’s Manu Raju.
Treasury Secretary Janet Yellen reiterated on Wednesday that if the debt ceiling was not raised, the federal government would be cash-strapped and face extraordinary measures by October 18. After that date, the Treasury would have very little cash to pay the country’s bills.

“While this is not our baseline scenario, we also believe there is a real risk that Congress may miss the deadline,” Goldman Sachs economists wrote in the report.

Goldman Sachs doesn’t place much weight on unilateral actions the Treasury Department might take to lower the debt limit, including minting a $ 1,000 billion coin or ignoring the limit citing the 14th Amendment.

“It is impossible to completely rule out these or other measures, but we are skeptical that such measures will come into play this year,” economists said in the report.

The most likely option to resolve the debt crisis, according to Goldman Sachs, is an autonomous increase in the debt limit through reconciliation – a process that Democratic leaders have opposed.

A big downside here is that it would likely force Democrats to specify a new dollar amount for the debt limit, likely close to $ 31 trillion, instead of just suspending it, Goldman Sachs said.

“Of course, these drawbacks are the reasons Republicans would want to demand Democrats to use it. Nonetheless, it seems to be the most likely option at the moment,” economists said.

Goldman Sachs stressed that any disruption in borrowing power would likely be short because “the response from the public and financial markets would likely force a swift political resolution.”

If Congress missed the deadline, Goldman Sachs said the Treasury would likely continue to pay principal and interest on Treasuries, but stop other payments ordinary Americans rely on.

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