Crypto News: Debt ceiling danger

Hello. Today we look at the danger of an unprecedented US payments default, improved prospects for Sri Lanka's debt restructuring, and the pace of pay gains in Japan.

Stubbornly high inflation and the Federal Reserve's interest-rate hikes dominate the discussion of economic risks for the world's biggest economy this year. But there's an even larger danger that's worth keeping close watch on: the federal debt ceiling.

If Congress doesn't raise or suspend the debt limit before the Treasury runs out of cash — something Wall Street analysts are penciling in for the third quarter of 2023 — the federal government won't be able to make good on all its obligations.

Because Republicans and Democrats have faced off over this issue time and again over the past several decades — without going past the crucial deadline — conventional wisdom says that a deal will again get done. But, as Bloomberg reports here, there's particular cause for concern this time.

"The market is quite complacent," says Tracy Chen, a portfolio manager at Brandywine Global Investment Management. But the showdown on debt "will be an extraordinary and most acrimonious event this year," she says.

The worst-case scenario would be a default on the $24 trillion market for publicly held Treasury securities. While there's been some contingency planning over the years, the consequences could be devastating, raising borrowing costs for everything from mortgages and auto loans.

"The burden on the US economy would take years to go away," said Jack Malvey, who's been watching the bond market since the 1970s.

Even if the Treasury kept making payments on bonds, curtailing payments on all other recipients of government money — from civil servants and Social Security beneficiaries to the military — would likely trigger an instant recession.

And confidence in US creditworthiness could still crater. During a debt-limit showdown in 2013, Fed officials, including Jerome Powell before he became chair, worried over the risk of a failed government debt auction that then reverberated through the financial system.

Then-New York Fed President William Dudley said there's "a risk of something going wrong even if you have more runway than you think."

This time, as in the past, Republicans want spending cuts in return for addressing the debt limit. Democrats want a "clean" increase and reject any conditions.

Each party has an incentive not to blink.

Republicans are looking for a way to get through to the American public that Democrats are wasteful, inflation-inducing government spenders. And Democrats want to portray the GOP as erratic, extremist and aligned with Donald Trump.

Tyler Cowen, a George Mason University economist and Bloomberg Opinion columnist, says things should be "fine" in the end. But he cautions that going through another tense process escalates the dangers.

"Look, if you run the experiment enough times, sooner or later it's not fine."

—Chris Anstey

Got tips or feedback? Email us at ecodaily@bloomberg.net

China has given assurances it'll support Sri Lanka's debt restructuring, potentially clearing the biggest hurdle for the South Asian nation to secure a $2.9 billion bailout from the IMF.

Sri Lanka now expects the IMF board approval by the end of March after its largest bilateral creditor gave written support for the debt restructuring via the Export-Import Bank of China, President Ranil Wickremesinghe told the parliament. Bloomberg reported the news earlier.

While some details are unclear — such as whether China will offer to take a haircut or extend the term of its loans at lower rates — it appears that Exim made the offer without the World Bank making any assurances on debt relief – something Beijing previously said it wanted (China owns about 20% of Sri Lankan government foreign debt, the World Bank holds 10%).

That raises hopes that Beijing could accelerate a debt deal with Zambia, where it has also been raising the issue of multilateral development banks offering relief, apparently slowing down talks.

Dovish hike | Australia's central bank signaled a pause in its 10-month tightening cycle is in prospect, prompting a selloff in the currency after policymakers delivered an expected interest-rate increase.
Jobs preview | US payroll growth has topped estimates for 10 straight months in the longest streak in decades, a trend that, if extended, will boost pressure on the Fed to keep raising rates.
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Inflation views | Consumer expectations for euro-zone inflation receded "significantly," according to the European Central Bank, bolstering calls for the pace of rate increases to be slowed.
Sterling weakness | Bank of England policy maker Catherine Mann said the pound could weaken further as investors consider rate-hiking plans by the Fed and ECB. Meanwhile Halifax said UK house prices rose at the quickest monthly pace since June.
Just in case | Morocco asked the IMF for a $5 billion credit line, with the institution's chief planning to recommend approval based on the nation's strong policy frameworks and track record.

Bank of Japan policymakers have long viewed a 3% pace of wage gains as vital to achieving 2% inflation. At long last, that may be in sight, at least by one measure.

Trade unions make annual wage demands of employers every spring, and this year the call is for 4.5%, the largest since 1995. Goldman Sachs Group Inc. economists estimate that, based on historical patterns, the actual pay hike stemming from the so-called shunto negotiations will come in at 3%.

That should lift Japan's overall wage growth to 2.4% in the fiscal year starting in April, Goldman economists led by Naohiko Baba wrote in a recent note. The shunto results won't come until after Governor Haruhiko Kuroda's final policy meeting on Friday, so Goldman only sees a tweak to the BOJ's yield-curve targets later in the second quarter.

And with real wages — adjusted for inflation — still in reverse, the BOJ will be in no hurry to move away from its stimulus settings.