Brace For "Nasty" Debt Ceiling Fight As GOP Goes Full "Scorched Earth Mode" On Democrats

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by Tyler Durden
Wednesday, Aug 11, 2021 - 02:15 PM

After Senate Republicans handed Democrats enough votes to pass their $1.2 trillion infrastructure package on Tuesday, they're digging in and planning to go into 'scorched earth mode' over the debt ceiling, according to RBC strategist Blake Gwinn, who says that a "nasty standoff" is all but guaranteed.

Sen. Ron Johnson speaks at a news conference on Capitol Hill on June 10.
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"I get that they would prefer a suspension of the limit vs. a numerical increase, but I can’t see any way Democrats are going to get 10 Republican votes for a debt ceiling deal in regular order, short of some extremely painful concessions," Gwinn said according to Bloomberg, adding "I expect GOP will be in scorched Earth mode this fall."

As Bloomberg explains, "this means further bill paydowns and a decline in the Treasury’s cash balance will drive a richening of bills versus OIS, flattening of the front-end bill curve toward zero, "specific mispricings" of Treasuries around the anticipated drop-dead date, repo softness. Worse comes to worst, there’s the risk of potential ratings action, though it hasn’t come to this since the 2011 debt ceiling episode."

The news comes after the Wall Street Journal reported that 46 Senators have signed a pledge to force Democrats to raise the debt ceiling via budget reconciliation - a process which doesn't rely on at least 10 GOP Senators to pass legislation.

In the letter, the Republicans said that Democrats need to take responsibility for the consequences of their spending, including the $1.9 trillion coronavirus-relief package that passed the Senate earlier this year without any Republican support. CBO said last month that faster economic growth spurred by the relief bill will likely offset the measure’s entire cost, and estimated that deficits over the next decade will be slightly lower than last projected in February, before the bill passed. -WSJ

"Democrats, at any time, have the power through reconciliation to unilaterally raise the debt ceiling, and they should not be allowed to pretend otherwise," reads the letter, which adds that Republicans won't be a party to boosting the debt limit via stand-alone bills or any other vehicle.

"They shouldn’t be expecting Republicans to raise the debt ceiling to accommodate their deficit spending," said Republican Sen. Ron Johnson, echoing previous comments by Senate Minority Leader Mitch McConnell (R-KY) that Democrats shouldn't expect any help from Republicans on the debt limit.

"This debt ceiling is going to cover all of the things that all of us have been opposing," McConnell reiterated on Tuesday, adding that the Democrats "need to do the responsible thing and raise the debt ceiling, because America must never default on its debt."

The brewing conflict has sent October and November Treasury Bills down relative to the rest of the short-end curve, while the timing over when the government will actually hit the debt ceiling is unclear. As of August 9, the Treasury's cash balance sat at $444 billion, up from $443 billion the prior session. While it started deploying 'extraordinary measures' this month to keep the government running, it wasn't able to provide a specific estimate as to how long it will last.

On Aug. 1, the debt limit, which had been suspended under a 2019 law, was reinstated at around $28.5 trillion, a figure that includes debt held by the public and debt held by government agencies.

The Treasury uses emergency accounting maneuvers to conserve cash so the government can keep paying its obligations, but those measures are expected to run out some time in the fall. Unless Congress steps in to suspend the debt limit again, the Treasury could begin to miss payments on its obligations and default. -WSJ

The "kink" in the Bills maturing around the debt ceiling D-Day is shown below:

And in context here...

Democrats, meanwhile, blame the 2017 GOP tax cuts for contributing to recent deficits, along with bipartisan relief packages issued during the Trump administration.

"It’s a shared responsibility," according to White House press secretary Jen Psaki. "Our view is that Congress should move forward as they have multiple times" to raise the debt ceiling.

Raising the debt limit doesn’t authorize new spending, but rather allows the Treasury Department to issue new debt to cover spending that Congress has already authorized, including payments to bondholders, Social Security recipients, veterans and others.

Under current law, the Congressional Budget Office projects cumulative budget deficits will total $12 trillion over the next decade, due in large part to rising costs of automatic spending programs such as Medicare and Social Security, as well as higher interest payments on the debt. Even if lawmakers don’t enact new deficit-financed legislation, the government will need to borrow to cover those obligations Congress has already authorized. -WSJ

With Republicans refusing to play ball, Democrats are mulling a stand-alone vote to suspend the debt limit, which could force Republicans to either support the measure or risk being blamed for the ensuing turbulence in the financial markets if the vote fails. Another option, according to a WSJ source, is that lawmakers could attach the debt ceiling measure to another must-pass bill, such as government funding, in order to force the issue.

According to the report, Johnson said that the idea for the letter came during a Senate Republican lunch on Monday, at which one member suggested it. Johnson wrote one, which he presented at the Tuesday lunch and circulated during the so-called 'vote-a-rama'  - a rapid-fire series of votes on budget resolution which kicks off Democrats' efforts to pass a $3.5 trillion package that will serve as a cornerstone of President Joe Biden's agenda.