Wall Street moderates are praying for big GOP margins to avoid a debt limit debacle

Wall Street moderates are praying for big GOP margins to avoid a debt limit debacle

Kevin McCarthy

Photo: Tom Williams/CQ-Roll Call via Getty Images

There are quiet whispers among Wall Street independents and even some Democratic donors to the financial services industry: If House Republicans win, they better win big.

Why it matters: Investors are increasingly worried about what a narrow majority for GOP House Leader Kevin McCarthy (R-Calif.) would mean for the divided government’s first big fight: raising the debt ceiling.

  • At private fundraisers and investor conferences, many worried that a razor-thin GOP victory would lead to a fragile McCarthy oratory — empowering conservative lawmakers to toy with the White House.
  • At the debt ceiling, this means that the full faith and credit of the United States could end up being a disaster, potentially destroying markets and wiping out trillions of dollars across asset classes.

What they say: “Investors are worried about all the public talk from McCarthy and the Liberty Caucus about getting us to the brink of the debt ceiling,” said Charles Myers, president of Signum Global Advisors.

  • “A McCarthy victory by a larger margin would be welcomed by investors because it gives him more room to maneuver,” he said. “Anything 20 [seats] or more would be considered sufficient to give McCarthy control and power over the most extreme part of the caucus.”

Driving News: As Republican prospects improve in the final stretch of the campaign, McCarthy’s statements — both about potential policies and his legislative strategies to achieve them — carry more weight.

  • This week, he was outspoken in suggesting that GOP support for the debt ceiling would come at a political cost. Democrats, he warned in an interview with Punchbowl Newshe would have to agree to cut spending.
  • Rep. Jim Banks (R-Ind.), who chairs the largest conservative bloc in the House of Representatives and could be the next Republican whip, went even further on Thursday – calling the debt limit a “major leverage point” and insisting “we have to use a moment like this to do things that the administration wouldn’t otherwise do.”

Big picture: With a divided government, the big battles between Congress and the White House are over funding the government, responding to international crises and raising the debt limit.

  • The US is likely to reach the $31.4 trillion mark, which was last raised in December 2021, early next year, according to the Bipartisan Policy Center, which tracks tax receipts and treasury flows to estimate the so-called “X date”. (Even Treasury officials privately marvel at BPC’s accuracy.)
  • But the Treasury Department has a few accounting tricks, which it calls “emergency measures,” to buy some time, possibly putting the actual “X Date” in the third quarter of 2023.

Flashback: In 2011, with a new GOP majority in the House of Representatives looking to President Obama on spending and entitlement reform, the US came so close to debt default that the S&P downgraded the US credit rating to AAA first time.

  • After the debacle of 2011, Obama took a maximalist — and ultimately successful — position: he they would not negotiate on the debt ceiling in 2013. Republicans eventually caved.
  • During Trump’s presidency, Republicans in Congress have supported three increases in the debt ceiling without demanding policy change.

What we’re watching: The debt ceiling could come sooner than currently expected for two reasons.

intrigue: Biden and congressional Democrats could raise the debt ceiling in a busy session, when they control both ends of Pennsylvania Avenue. That would essentially save McCarthy the headache of dealing with the demands of his members.

  • But it’s unclear what political incentive Democrats have — other than keeping the U.S. economy from falling into the abyss — to solve McCarthy’s potential political problem instead.

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