Moody's economist warns debt ceiling deal will be 'heavy lift'

The U.S. has until mid-August before it runs out of cash, Moody's Analytics chief economist Mark Zandi told a Senate panel Tuesday, and the longer the debate over the debt ceiling persists, the more damage it will do to the economy and the financial markets.

"That gives you about six months" to take action on the debt ceiling, Zandi told the Senate Banking subcommittee hearing Tuesday led by Sen. Elizabeth Warren, D-Mass.

In a new report, Moody's Analytics named Aug. 18 as the so-called "X date" after which Treasury may not be able to pay all the government's bills, and warned that odds that Congress is unable to avoid a debt limit breach appear "meaningfully greater than zero."

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The U.S. officially hit its $31.4 trillion debt ceiling limit on Jan. 19, prompting Treasury to take temporary measures to free up room. In an unusual move, Treasury opted not to suspend the sale of State and Local Government Series securities, the measure most closely watched by the municipal market.

Congress last raised the debt ceiling in December 2021.

Tuesday's hearing comes as House Republicans have vowed to block debt ceiling relief unless Democrats and President Joe Biden agree to trim federal spending. The Republicans have yet to specify proposed cuts, but have said their goal is a balanced budget within 10 years. Zandi said that would require roughly $16 trillion in cuts over the decade.

Biden will unveil his fiscal 2024 budget Thursday. Republicans are set to produce their own budget, which they say will keep domestic spending flat to fiscal 2022 levels, by April 15.

The difficulty House Republicans had in electing Kevin McCarthy and the conditions that McCarthy agreed to, including a debate over the debt limit, "do not augur well for a reasonably graceful resolution to the current impasse," the Moody's report said. "Getting highly contentious debt limit legislation signed into law through this Congress before a potential breach will be a heavy lift."

Recalling that S&P Global Ratings downgraded the U.S. in 2011 over the debt limit battle, the report noted that Moody's Investors Service would downgrade if Treasury failed to make a bond payment. "A downgrade of Treasury debt would set off a cascade of credit implications and downgrades," including of municipalities, Moody's said.

A default would hit cities hard, the National League of Cities said in a February blog post. The impact would come both from likely federal cuts in health care and infrastructure aid as well as higher borrowing costs, the NLC said.

The U.S. has always been "money good," Zandi said, "and if we so much as one second go over the line, we lose that forever, and it's incalculable, the cost," he said, noting that even a "few basis points" on $31 trillion is massive. "We'll be shelling out cash to Japanese and Chinese and British bond investors instead of investing in our schools and Head Start and the military."

Ahead of Zandi's testimony, Louisiana GOP Sen. John Kennedy said he would vote to ensure the U.S. would not default, but added that the debate presents "an opportunity to talk about our rate of growth in spending and our debt accumulation.

"If you're going to have a party, you gotta pay the band, and we're going to do it," Kennedy said.