There is still no agreement, but the negotiators have reached positions. Democrats and Republicans are negotiating against the clock an agreement to extend the debt ceiling before the date on which the Treasury cannot meet its payment obligations. No one knows for sure when that X date will arrive, but Treasury Secretary Janet Yellen has warned that it is very likely to be early June and there is a risk it may even be the first day of the month.
The agreement is taking shape. It would be about extending the debt ceiling for two years in exchange for imposing spending limits for the same period. That would cover what’s left of Joe Biden’s presidency. The spending limits would not affect military spending or veterans’ payments and would focus on other programs, but they would not be as aggressive as those included in the first Republican proposal, passed as a bill in the House of Representatives. However, the figures are not decided and the negotiations may derail.
The deal would also include a measure to upgrade the nation’s power grid to accommodate renewable energy, a key climate goal, while speeding up permitting for oil pipelines and other fossil fuel projects favored by the GOP, according to sources familiar with the deal. with the possible pact cited by the Bloomberg agency.
The pact would cut $10 billion from an $80 billion budget increase for the tax agency that Biden managed to include in his Inflation Reduction Act. Republicans have warned, often using false arguments, of a wave of inspections, while Democrats have said the increased spending would fill jobs and provide better service and would pay for itself in the fight against corporate tax fraud and higher incomes, but that would not affect the average and low incomes.
The pressures on the negotiators are great on both sides, which may ruin the chances of a final deal. The more extreme Republicans appear to prefer the United States to default than pass up the opportunity to demand massive spending cuts. This Thursday 35 Republican congressmen led by Scott Perry and Chip Roy have sent a letter to the speaker of the House of Representatives, Kevin McCarthy, in that sense. It is the same group that resisted electing McCarthy in January and that finally gave in, demanding, among other things, toughness in negotiating the debt ceiling.
McCarthy is not going to have an easy time convincing them to accept a deal that also has the approval of the White House. For his part, Biden must also be careful not to cause defections in his ranks. As the negotiation progresses, the two parties keep the political rhetoric alive and hold the other party responsible for a possible failure.
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This Thursday, Biden took advantage of an act that had nothing to do with it, the presentation of his proposal to appoint General Charles Brown as Chief of Staff, to present his position on the negotiations. “Speaker McCarthy and I have had several productive conversations, and our teams are still meeting as we speak, in fact, and are making progress. I have made it clear time and time again: Defaulting on our national debt is not an option. The American people deserve to know that they will continue to receive their Social Security payments, that VA hospitals will continue to open, and that we will continue to thrive financially. Default puts all of that in jeopardy. Congressional leaders get it, and they all agree: there will be no default. And it is time for Congress to act now”, he has said.
Biden insists that the negotiations are about the budget, not about default and maintains that the two parties have conflicting visions of the United States. According to the president, the Republicans want to put that burden on the shoulders of working and middle-class Americans, with cuts in teachers, police officers, border patrol agents and longer wait times for Social Security applications. Biden wants to make companies pay (especially oil and pharmaceutical companies) and high incomes.
Congressmen have adjourned for the holiday weekend (Monday is Memorial Day) without reaching an agreement, but negotiators, including McCarthy and Patrick McHenry, a North Carolina Republican , they will continue working during the weekend. “We know where our differences are. We don’t have an agreement yet. We knew it would not be easy. It is difficult, but we are working. And we’re going to keep working until we get it done,” McCarthy told reporters on Capitol Hill.
The markets will be closed for three days and the hope is that they will be enough to close a deal. Markets have been suffering from uncertainty. The stock markets have accumulated several days of decline and the debt market has suffered some distortions. In particular, investors are demanding a risk premium for bills that mature at the beginning of June, on the days with the highest risk of default. The annualized return on these bills has been at times above 7%, but in reality they are only a few days away from expiration, so the premium is minimal. One-year bills are at 5.2%, in line with official short-term interest rates.
Fitch has placed the US AAA credit rating on negative watch and DBRS Morningstar has done the same. Interestingly, the experience of 2011 suggests that even in a Treasury default risk scenario, investors (paradoxically) seek refuge in Treasuries, which often causes them to rise in price and lower their interest rates. The stock market is usually the most punished.
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