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Debt ceiling: What short-term extension means for U.S.

Eurasia Group U.S. Managing Director Jon Lieber joins Yahoo Finance Live to break down the credit rating implications amid the debt ceiling talks and what an extension to the default date could mean for the U.S. economy.

Video transcript

- All right. Well, the other big story of the day is Fitch Ratings has placed the United States top credit rating on watch. This comes as negotiators have failed to reach a deal on the debt ceiling, getting closer and closer to that ex-date. Well, with time running out, there are talks of a plan to delay nondebt payments. Those talks are starting to surface and gaining a little bit more traction. Here with more, I want to bring in John Lieber, Eurasia Group Us Managing Director. John, it's great to see you here, and I know that this is something that you have done a lot of research and a lot of, I guess, just diving into exactly what this would look like. So break down how this would play out, and how much time this would potentially buy the administration and lawmakers.

JON LIEBER: What's interesting about this debt limit is that it's coming potentially on June 1st. So that's an important date because you're only about two weeks away from a massive influx of tax revenues that would happen on June 15th, which is one of the US's four quarterly filing deadlines. So if you end up breaching the debt limit and the Treasury spends out all its cash around June 1st or June 2nd, which is what Treasury Secretary Janet Yellen has been saying, it's possible that instead of going into default, what you could do instead is delay whatever payments are due on the first and second, particularly payments to vendors, or to hospitals, or to federal government contractors.

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And in delaying those payments, wait for your revenues that come in through withheld tax receipts to build up again. And then make everybody whole, buying you time until June 15th, which then gets you additional revenue that would extend the ex-date by several more weeks and potentially months. This is not ideal. And one of the big problems with it is that you might end up having to skip money going out the door to Social Security recipients. But other agencies of government have a lot of experience with these kinds of delays, and vendors probably wouldn't mind all that much.

- Yeah. I mean, let's pick up on that point. I mean, people hear Social Security and delay. And that alone is cause for concern. When you're talking about nondebt payments, you mentioned vendors, like hospitals, potentially Social Security. What about salaries? I mean, what are the other things that could potentially be delayed just to try and save the talks?

JON LIEBER: Yeah. I mean, the big ones would be any payments to contractors, salaries of federal government workers to the extent they come due on June 1st or June 2nd. Anybody who's getting paid later in the month wouldn't really be affected by this as revenues would be coming in. Payments going out to the entitlement programs, a lot of which are going to go to these large hospital organizations and vendors through CMS.

And I think the big politically risky one here is going to be the ones that are the direct benefits, like I mentioned, which are going to be the salaries, veterans benefits, Social Security. Those are the most politically fraught ones. But the fact that this would be a relatively short period means that the government may escape relatively unscathed. And at the same time, they keep making their debt payments, which means they avoid default. It's not a perfect option. No one's even sure if it's technically feasible. But it makes a lot more sense than some of the other ideas that have been put on the table, such as issuing new debt under the 14th Amendment or the omitting a trillion dollar coin and giving that to the Federal Reserve.

- Jon, before we get a little bit into some of those other alternatives that have been brought forward here. In terms of this potential alternative, could it face any legal challenges, or what does that potentially look like?

JON LIEBER: Yeah. I mean, all of this is relatively new territory. The US has never spent down its cash balances and gone past the ex-date yet. So there is some precedent in the past for the federal government not acting in time to ensure that payments to doctors go out the door.

And so the Center for Medicare and Medicaid Studies has delayed payments to those vendors in the past. And they can do so relatively routinely. That did not result in any lawsuits, and no one really got that upset about it. In this case, because you'd have such a broader base of people who might be potentially subject to this delay, it could trigger a lawsuit on the fact that they are contractually obligated to get these payments. Maybe there's some quirk in the Social Security law that I don't know about. So there's a lot of legal risk here for Treasury doing this. But again, it would be preferable to them to do that and get sued than it would be to default.

- Let's talk about where the numbers are right now in DC. You've got about 35 House GOP lawmakers, members of the Freedom Caucus sending this letter to House Speaker Kevin McCarthy, essentially calling him to hold the line on issues about clawing back some of those COVID benefits or unspent COVID benefits. Also clawing back some of that money set aside for additional IRS agents.

If in fact there is a compromise here that could potentially push the debt limit higher or potentially kick the can down the road, how many GOP lawmakers do you think are willing to break ranks? Because right now, we're still seeing a unified face.

JON LIEBER: Yeah. I think of that group of 35 lawmakers, you're probably going to get about zero of them to actually vote for the final compromise. I don't think that group is interested in voting for the final deal that McCarthy cuts with Biden. What they want to do is ensure that that deal is as close to their preferred policy outcomes as it can possibly be. They're the ones who push the $4 trillion in cuts, the 9% cuts in FY24 spending. And so that group knows they're not going to get that stuff. But what they want is to just make this bill as conservative and close to their preferred policy outcomes as they can possibly get.

So I would probably take all 35 of them off the table. You still have almost 200 Republicans who could still vote for this deal, even if that group doesn't. And what McCarthy really needs is to ensure that the deal is good enough, that enough Republicans vote for it, and also good enough that that group who doesn't like it doesn't move to remove him from his job, which is really the big threat that's hanging over his head right now.

- It's certainly set up to be a challenging couple of days ahead. John Lieber, great to have you here, Eurasia Group Us Managing Director.