As the Debt Ceiling Countdown Begins, Should Markets Worry?

The United States is expected to reach its debt limit on January 19, 2023, earlier than many expected. However, the US Treasury Secretary, Janet Yellen, plans to take extraordinary measures that will enable the government to continue to meet its obligations for several months until an estimated date of “early June”.

This brings back memories of 2011, when controversy over raising the debt ceiling pushed the US to within two days of default, which rattled stock markets and contributed to a downgrade of government debt. The political stage since then is much the same as now, with Republicans controlling the House of Representatives and a Democratic president.

However, it is also important to note that many other increases in the debt ceiling throughout history have been far less events, and politicians still have several months to resolve this issue.


The US debt limit is expected to be reached in January 2023, according to the A message sent by Janet Yellen to the congressional leadership. However, extraordinary measures provide more time for the United States to meet its obligations while not defaulting.

It is complex to estimate how much additional time the extraordinary measures will provide, but the Treasury currently estimates that “the funds and extraordinary measures are unlikely to be exhausted before early June.” [2023]. “

How will extraordinary measures work?

Specifically, Yellen plans to stop making new investments and redeem others from various government-run retirement, health and disability benefits funds. This will free up money for the government to operate in the short term, and once the debt ceiling is raised, that money will be full. This action is what previous Treasury secretaries have done.

political picture

There are several months to reach a political agreement, but Democrats and Republicans are far apart for now. White House He said They will not negotiate. In contrast, Speaker McCarthy seems to be looking for him agreement to reduce spending. These contrasting positions and the relatively slim Republican majority could shape a relatively fraught process over the coming months.

Can the US debt rating be downgraded again?

Theoretically, the US debt could see another credit rating downgrade. The US debt is currently rated AA+ by S&P after the 2011 credit rating downgrade. Now, this rating is lower than the AAA rating of several European countries, Canada, Australia and Singapore. However, both the UK and France have an AA rating, which is currently lower than the US despite the current lower debt levels relative to GDP than the US.

As such, depending on how the debt reduction negotiations are handled, it is possible that the US could see another downgrade, albeit a less significant one than the loss of the AAA rating. However, there are many factors that determine the calculation of a country’s credit rating. It is unclear how the ratings agencies will react to potential events around the debt ceiling negotiations while they are in progress.

Default risk

Aside from the risk of credit downgrades, there is also the risk that the US government will default on certain payments, even for a short period. This could happen if the debt ceiling is not raised once extraordinary measures have been exhausted.

Even if it lasts only a few days, any default event could have material and unforeseen consequences for the US government and credit markets. In 2011, it was estimated that the US government was two days away from default, despite avoiding default. So, although the 2011 debt ceiling debate is being held as a nightmare scenario for markets, worse outcomes are likely.

Less recent discussions of the debt ceiling

2011 clearly demonstrated the risks of brinkmanship to the market with regard to the debt limit, and in fact the actual default, which was narrowly overlooked, would have been worse. The political stage in 2023 looks much the same, but history also shows that the debt ceiling has been raised several times without incident. However, without a quick fix to this issue, the debt ceiling may affect the markets over the coming months.

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