" Credit Musings: January 12, 2023 – Public Trust Advisors

Credit Musings: January 12, 2023

Jan 12, 2023

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Public Trust Credit Team

Congress' recent Speaker battle sets up a potential preview for the debt ceiling combat anticipated later this year.

It has been 100 years since it took more than one ballot to elect the Speaker of the House. In December of 1923, it took nine ballots to elect Frederick Huntington Gillett and on January 7, 2023, it took 15 ballots to elect Kevin McCarthy as Speaker after he made several large concessions to GOP holdouts. The U.S. debt ceiling will need to be raised in the first half of the year, and the battle for Speaker gives us a preview of what may lie ahead. GOP faction members who were holdouts are purportedly ‘anti-spending’ and can be expected to use their influence to dampen any debt-ceiling negotiations in the House; additionally, the most recent debt-ceiling fight in the Senate in December of 2021 was particularly bruising. While raising the debt ceiling used to be a formality, in recent years, it has become more and more contentious as anti-spending members have latched onto it to win favor with their constituents, with an eye towards a more conservative approach. Raising the debt ceiling does not approve new spending; instead, it allows the U.S. to issue more debt to pay the obligations it has already incurred. Should the ceiling not be raised by its deadline, the U.S. would likely have to prioritize debt payments over other spending such as payrolls and social security to stave off the risk of default which would certainly have far-reaching negative effects globally. This is not the first time, however, that the U.S. has fought over the debt ceiling. In 2011, S&P infamously downgraded the U.S. from “AAA” to “AA+” because of the increased partisanship surrounding the debt ceiling.  At that time the U.S. was on a negative credit watch until the Budget Control Act Amendment was passed and allowed the agency a better view into what debt negotiations would look like moving forward. S&P was the only agency to downgrade the U.S. sovereign, but it would be hard to argue that Congress has become less partisan since 2011.  Further, the recent Speaker altercations has given more power to anti-spending factions who are likely to hold up debt negotiations when the time comes. Will the U.S. see a downgrade or negative outlook again? Will Moody’s take action this time if it becomes a drawn-out fight? The answers to these questions are unclear, but the S&P decision in 2011 showed us that U.S. debt, despite being one of the world’s safe havens, is not immune to rating downgrades. 

All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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