Coming this close to missing the deadline to raise the debt ceiling before the U.S. Treasury could no longer finance government operations is certainly not good news. Nevertheless, markets and investors can breathe a sigh of relief if a deal gets across the finish line.
The most serious impact of failing to ratify the deal would be a default by the U.S. government. This would happen if the U.S. Treasury delayed interest or principal payments on Treasury securities. A “technical default” would occur if the Treasury failed to make payments when due on its noninterest obligations, such as to government contractors or to recipients of entitlements such as Social Security.
A default would damage U.S. credibility. The United States would no longer be able to fully reap the benefits—notably, financing on the best possible terms—bestowed on the most reliable debtors. The government’s own financing costs, borne by taxpayers, would increase. And since broader borrowing costs are pegged to Treasuries, interest rates would also likely rise for businesses, homeowners, and consumers.
Failure to approve a deal and raise the debt ceiling would also pressure stocks because higher rates would make companies’ future cash flows less predictable. Spillover effects for global markets and economies would be likely. Such developments, occurring at a time when global recessionary risks are already increasing, make averting such a scenario even more crucial.