JPMorgan Chase, the largest lender in the U.S., has begun preparing for the possibility of the country
defaulting on its debt, the bank’s president and CEO Jamie Dimon told Reuters on Tuesday (Sept. 28).
“This is like the third time we’ve had to do this, it is a potentially catastrophic event,” he said in an interview with the news agency. “Every single time this comes up, it gets fixed, but we should never even get this close” he added.
The New York-headquartered multinational investment bank and financial services holding company has begun scenario-planning for how a potential U.S. credit default would affect financial markets, client contracts, its capital ratios and America’s credit ratings, the head of JP Morgan said, adding he nevertheless expected policymakers to find a solution.
“If I remember correctly, the last time we got prepared for this, it cost us $100 million,” he said before a ribbon-cutting ceremony in Washington at one of his bank’s newest locations.
His remarks came the same day Treasury Secretary Janet Yellen told lawmakers that the federal government will run out of cash and extraordinary measures by October 18, setting the stage for a potential default if Congress does not raise or suspend the federal debt limit by that date.
“It would be disastrous for the American economy, global financial market and millions of families and workers whose financial security would be jeopardized by a delay in payments,” Yellen testified before the Senate Banking Committee. “Even coming very close to the deadline without raising the debt ceiling can undermine the confidence of financial markets in the creditworthiness of the United States.”
In the Senate, Republicans Monday night blocked Democrats’ latest effort to raise the debt limit, less than three weeks before the U.S. Treasury potentially runs out of capacity to avert a federal payments default.
Democrats, meanwhile, are rushing to raise the government’s $28.4 trillion borrowing limit. The debt ceiling has been a point of contention between both parties since it was instituted in 1917 to cap the amount of money the government can borrow. Congress has voted 80 times to raise or suspend the debt limit since 1960. It was suspended three times during the Trump administration.
The debt ceiling debate in Washington has also weighed on stocks. On Tuesday, the S&P 500 posted its worst day since May, tumbling 2% as concerns over a government shutdown grew. The tech-heavy Nasdaq Composite posted its worst day since March amid a spike in bond yields and the Dow Jones followed suit. The S&P and the Dow Jones are now down 3.5% and 2.6%respectively, for September while the Nasdaq is down more than 4.5%.
Indications the Federal Reserve plans to begin scaling back its asset purchases in the near future has contributed to a recent spike in bond yields, which move opposite of bond prices. The yield on the benchmark 10-year Treasury note rose for a sixth consecutive day Tuesday, climbing to 1.534%, its highest level since late June.
Government funding runs out on Oct. 1. but analyst consensus indicates confidence the crisis will be averted.
The world’s largest economy faces an estimated $20 billion in Social Security payments on Oct. 20 along with around $6 billion in individual tax refunds, the Wall Street Journal reported citing forecasts by the Bipartisan Policy Center. The U.S. also faces $49 billion in payments through Oct. 29, and then an additional $80 billion in payments on Nov. 1, including $14 billion in interest on the federal debt.
Earlier this month, The Business Roundtable, an association of chief executive officers of America’s leading companies sounded the alarm on the debt ceiling.
“Failure to lift the U.S. federal debt limit to meet U.S. obligations would produce an otherwise avoidable crisis and pose unacceptable risk to the nation’s economic growth, job creation and financial markets,” Josh Bolten, president and CEO of the Business Roundtable, and Doug McMillon, Walmart’s chief executive and the chair of the business lobby, wrote in a letter to Senate Majority Leader Chuck Schumer, House Speaker Nancy Pelosi, Senate Minority Leader Mitch McConnell and House Minority Leader Kevin McCarthy.
Meanwhile, according to a Financial Times report, US giant lender Morgan Stanley mentioned it was additionally planning for the opportunity of a US credit score default.
Mark Zandi, chief economist at Moody’s Analytics, told CNN: “It would be financial Armageddon. It’s complete craziness to even contemplate the idea of not paying our debt on time.”
The United States has never defaulted on its credit. This would be uncharted territory.
House passes debt ceiling suspension
The House on Wednesday (Sept. 19) voted 219-212 to suspend the U.S. debt limit through Dec. 17, 2022. All Democrats except Reps. Jared Golden of Maine and Kurt Schrader of Oregon supported it. Every Republican but Rep. Adam Kinzinger of Illinois opposed it. The bill now heads to the Senate, where it will almost certainly be blocked by Republicans. The bill would need 60 votes to advance in the chamber that is split 50-50. Republicans have cited Democrats’ plans to pass trillions of dollars in new spending for President Joe Biden’s economic agenda for their opposition to raising the debt ceiling. Conventional wisdom holds that Washington politicians would not, surely, be willing to drive the country off a cliff.
Government shutdown avoided but threat of default continues to loom
The Senate and the House both passed a stopgap spending bill which funds the government through December 3. The final vote tally was 65 in favor and 35 against as all 50 Democrats backed it and 15 Republicans joined them. While a government shutdown was avoided, lawmakers are still trying to deal with another crisis: the U.S. continues to face a potential default amid an impasse over raising the debt ceiling. The White House blasted what they saw as Republican obstructionism, saying that the party is “playing politics with an economic catastrophe.”
Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell also testified before the House Financial Services Committee on Thursday (Sept. 30). Yellen reiterated her call for Congress to raise the debt ceiling. When asked by a member of the Committee if the damage done by failure to meet the federal government’s debt obligations would be “irreparable,” Yellen answered: “Yes.”
Powell’s prepared remarks mirrored those he delivered before the Senate Banking Committee on Tuesday, with the Fed head warning of upside risks to inflation.
S&P Global Ratings said in a bulletin on Thursday it anticipates the Congress will address the debt ceiling in a timely manner, either by raising it or suspending it. “It would be unprecedented in modern times for an advanced G-7 country, like the U.S., to default on its sovereign debt,” the rating agency said.
A default on U.S. debt that would result in job losses, soaring interest rates, a drop in the stock market and an instant recession.
In an effort to underline the severe economic risks of a debt default, US President Joe Biden will meet on Wednesday (Oct. 6) with financial and corporate leaders at the White House. Several chief executive officers of major corporations are expected to attend, including JPMorgan Chase & Co.’s Jamie Dimon, Bank of America Corp.’s Brian Moynihan, Citigroup Inc.’s Jane Fraser, Nasdaq’s Adena Friedman.
Ahead of the meeting, the White House warned that failure to extend the government’s borrowing authority could set off a global financial crisis that the United States may not be able to manage.
“A default would send shock waves through global financial markets and would likely cause credit markets worldwide to freeze up and stock markets to plunge,” the White House Council of Economic Advisers said in a new report. “Employers around the world would likely have to begin laying off workers.”
The Senate, meanwhile, is scheduled to vote Wednesday on whether to take up legislation to raise the debt ceiling until December 2022. Republicans are again expected to block it and Biden suggested the Democrats could change the chamber’s rules to bypass the Republican roadblock.
“Oh, I think that’s a real possibility,” The New York Times quoted Biden as saying when asked if Democrats were considering the last-resort route, which would involve making an exception to allow for a debt ceiling bill to pass with a simple majority instead of the usual 60 votes needed.
Moody’s Investors Service said on Tuesday (Oct. 5) it expects Washington will raise the debt limit.
Agreement reached on a short-term debt ceiling increase
United States Senate Majority Leader Chuck Schumer said on Thursday (Oct. 7) lawmakers reached an agreement on extending the debt ceiling until early December. “I have some good news,” Schumer, D-N.Y., said from the Senate floor. “We have reached agreement to extend the debt ceiling through early December, and it’s our hope that we can get this done as soon as today.”