- JPMorgan said the most likely outcome of the debt ceiling standoff is a deal to lift it before the US runs out of money.
- But the chances that the US will go beyond the default X-date without a deal are 25% and are rising, analysts said.
- A technical default could still be avoided, though the US would likely lose its credit rating.
The likelihood is growing that the US government will run out of funds before lawmakers agree to raise its borrowing limit, JPMorgan said in a Wednesday note.
The warning comes as Treasury Secretary Janet Yellen reiterated her forecast of an early-June deadline to raise the debt ceiling. Meanwhile, the Biden administration and Republicans in Congress continue to show little progress on a deal.
"We still think the most likely outcome is a deal signed into law before the X-date, though we see the odds of passing that date without an increase in the ceiling at around 25% and rising," wrote Michael Feroli, JPMorgan's chief US economist.
In the event that lawmakers miss the deadline, JPMorgan said the Treasury Department could avoid a technical default by prioritizing its debt payments ahead of other obligations.
But doing so would still be consequential, Feroli added, pointing to a likely downgrade of the US credit rating. In fact, Fitch Ratings has already confirmed it would downgrade the US from its triple-A rating score if the government made debt payments but skipped other outlays.
And failure to make debt principal and interest payments on time would result in "much worse outcomes," he said.
While Wall Street largely expects the US to avoid default, investors are getting more jittery about the debt crisis. Treasury traders have demanded higher yields for short-term Treasury bills, indicating greater risk, with some corporate debt even being seen as safer.
Federal spending is a central bargaining point, and JPMorgan estimated that plans from the White House and Republicans could reduce it by 0.1% to 0.5% of GDP in the next fiscal year.
However, this wouldn't reduce GDP by the same rate, nor would spending cuts would be felt immediately, Feroli said.
"Instead, it's probably more apt to think how much less work the Fed needs to do in restraining aggregate demand because fiscal belt-tightening is now doing that job," he wrote.