“Because we’ve been through this before, I think people will still expect a deal to come together until the very last minute,” Gwinn said.
During the debt limit battles of 2011 and 2013 investors grew worried as default neared. In 2011, yields on effected Treasury bills began to surge about eight days ahead of default and in 2013 about 20 days beforehand. Stocks tumbled in the aftermath of the 2011 sovereign downgrade by S&P Global Ratings.
The debt standoffs also have direct costs to taxpayers because of the higher interest rates investors demand because of the payment uncertainty.
Delays in raising the debt limit in 2011 forced the government to pay $1.3 billion in additional borrowing costs that year, not including any impact on the Treasury’s costs in later years, according to a U.S. General Accountability Office assessment the following year.
Democrats can raise the debt ceiling on their own through a process called reconciliation, which bypasses the filibuster in the Senate. The most likely scenario would have Democrats revise an already-passed budget resolution that set the stage for an economic package of as much as $3.5 trillion, creating separate legislation to raise the debt ceiling.
The process would involve two lengthy Senate debates and “vote-a-ramas,” where scores of amendments could be offered. Once the Senate is finished, the House would have to clear the amended budget resolution and the debt-cap hike. Other Democratic lawmakers have stopped short of ruling out the go-it-alone strategy.
Yellen’s new estimated timeline -- an update from the “some time” in October she had previously advised -- suggests Democrats will need to get started on the reconciliation process within days if they opt to pursue that solution.
“While this is our best estimate, the federal government’s cash flows are subject to unavoidable variability,” Yellen said in her letter to House Speaker Nancy Pelosi, Schumer, Senate minority leader Mitch McConnell, House minority leader Kevin McCarthy and other top lawmakers. “This uncertainty underscores the critical importance of not waiting to raise or suspend the debt limit.”
This article was provided by Bloomberg News.