The ongoing banking turmoil in the United States could add to the urgency of the debt-ceiling issue, said Brian Gardner, Stifel's chief Washington policy strategist.
The crisis in the banking sector could cause a credit contraction, which could potentially slow down the economy and reduce the government's revenue, Gardner told Yahoo Finance Live. These factors could further complicate efforts to raise the US debt ceiling.
The United States hit its $31.6 trillion debt limit in January, and lawmakers have been deadlocked on raising it.
The Treasury Department has been using "extraordinary measures" to continue servicing US debt payments, but those measures are expected to run out sometime this summer. This means that a divided Congress must pass legislation that sets a higher debt limit or face a catastrophic default.
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Gardner estimated that the deadline for the debt-ceiling issue would move up by days or weeks rather than months. Although the likelihood of not getting a deal in a timely manner is low, Gardner warned that the longer the issue goes unresolved, the higher the chances of a mistake being made.
He added that any legislation to address the banking crisis could be attached to a bill to lift the debt ceiling, which would further complicate efforts to avoid a default.
Several lawmakers have proposed expanding the level of deposits that the FDIC guarantees and tightening regulatory oversight on banks to address the banking crisis.
However, with neither party conceding to the other, Gardner thinks that stock market volatility will force Congress to reach a deal on the debt ceiling. He noted that a similar standoff in 2011 was resolved as investors began realizing that a default could actually occur. "That volatility in the market is what really forced Congress to finally act," Gardner said. "A lot of times it's market action, market pressure that gets Washington to act."
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In conclusion, the ongoing banking turmoil in the United States could complicate efforts to raise the debt ceiling. While a deal is likely to be reached, the longer the issue goes unresolved, the greater the risk of a catastrophic default.
Lawmakers may attach legislation to address the banking crisis to a bill to lift the debt ceiling, further complicating efforts to avoid a default. Ultimately, market pressure may force Congress to act on the debt ceiling issue. It is important for lawmakers to work together to find a solution that protects the interests of all stakeholders and avoids a default.
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