'Extraordinary measures' to avoid U.S. default to begin mid-January

The U.S. borrowing cap resumes on midnight Wednesday, bringing with it the risk of a prolonged political impasse that invites market dislocation, downgrades and other headwinds for municipal bond issuers and investors.

In a letter Friday to House Speaker Mike Johnson, R-La., and other Congressional leaders, Treasury Secretary Janet Yellen said she expects the U.S. will hit the borrowing limit in mid-January. To preserve cash, the Treasury Department will begin to deploy its so-called extraordinary measures.

"Treasury currently expects to reach the new limit between Jan. 14 and Jan. 23, at which time it will be necessary for Treasury to start taking extraordinary measures," Yellen said. "I respectfully urge Congress to act to protect the full faith and credit of the United States."

Yellen has not said when the special measures would be exhausted, though some economists have pegged the "X date" at around next July or August. Congress would need to resolve the looming debate before that date to avoid a first-ever U.S. default.

The extraordinary measures are likely, but not certain, to include the suspension of new sales on State and Local Government Series securities. State and local governments often purchase SLGS for their advance refunding escrows.

Suspending the sale of SLGS "limits counties' ability to refinance or issue additional bonds to save taxpayers money and continue to finance critical infrastructure," the National Association of Counties said in a May 2023 article during the last debt ceiling impasse.

Last year, however, Treasury did not include the suspension in its first round of measures.

If the debate is not resolved as the X-date nears, issuers are likely to hit the pause button on their borrowings and investors may hold off until the standoff is resolved.

Political battles over the debt limit have twice sparked downgrades of the U.S. sovereign rating. Last August, Fitch Ratings downgraded the U.S. federal government's long-term credit rating to AA-plus from AAA, citing chronic debates over the debt ceiling, among other factors. S&P Global (SPGI) downgraded the U.S. amid a political impasse on the federal debt limit in 2011.

The resolution to the 2011 borrowing limit debate created automatic spending cuts, or sequestration, that affect federal subsidy payments for direct-pay bonds like Build America Bonds through next year.

The 2023 deal between former House Speaker Kevin McCarthy and President Joe Biden suspended the debt ceiling until Jan. 1, 2025. The agreement, opposed by hard right Republicans, helped drive McCarthy out of office. The recent battle over a continuing resolution illustrates the same dynamics are at play.

President-elect Donald Trump and Johnson had pushed for the debt ceiling to be either extended or fully eliminated under the CR, but the proposal failed. "I call [the debt ceiling debate] '1929' because the Democrats don't care what our Country may be forced into," Trump said later on a Truth Social post. "In fact, they would prefer 'Depression' as long as it hurt the Republican Party."

Republicans take full control of the Congress on Friday. They will need to either pass the debt ceiling provision as part of a budget reconciliation bill or secure Democrats' support for passage of a separate bill.

The issue will be part of a full agenda that includes full 2025 appropriations bills, tackling the expiring Tax Cuts and Jobs Act provisions and beginning work on the next surface transportation bill.