Democrats are pursuing an almost certainly doomed strategy to avert a government shutdown and stave off a federal default, raising the likelihood of financial-market stresses that will ultimately force U.S. lawmakers' hands.
While the House on Tuesday night approved a bill to keep the federal government funded past the end of the fiscal year on Sept. 30 and to suspend the debt limit for more than a year, blanket Republican opposition means it's assured of failing in the Senate.
Once that Senate rejection — expected in coming days — is complete, the clock will be ticking until the government runs out of authorization to keep many operations running past month-end. Sometime later in October, according to Secretary Janet Yellen, the Treasury Department will exhaust its capacity to keep paying U.S. obligations.
While multiple scenarios are possible, close observers of fiscal negotiations have penciled in the Democrats eventually opting to remove the debt limit from the stopgap spending bill. That would ensure the bipartisan passage of the government funding measure, with Democrats raising the debt ceiling using a fast-track process that bypasses the filibuster, removing the need for GOP votes.
"We expect most of these 'D.C. problems' will be resolved," Michael Zezas, Morgan Stanley's chief U.S. public policy and municipal strategist, and fixed-income strategist Ariana Salvatore wrote in a note Tuesday. However, "it's important for markets to note that the path to resolution on these issues likely includes elevated uncertainty in the near term," they wrote.
The following is a look at a potential timeline.
1. Senate Rejection
The Senate needs 60 votes to cut off any filibuster of the stopgap spending bill — known as a continuing resolution — that includes a suspension of the federal debt limit until mid-December of 2022 along with funding for the government until Dec. 3, 2021. That means 10 GOP votes in the 50-50 Senate.
Senate Minority Leader Mitch McConnell has said there is no chance that a debt limit increase could pass the chamber. Republicans have nearly universally said they won't vote for an increase to the government's borrowing ability as Democrats prepare to spend $3.5 trillion on social programs via separate legislation.
Democrats have nevertheless called on Republicans — who as a group have raised no major objection to the stopgap spending bill — to join in the debt-limit suspension vote. They've invoked the long history of similar bipartisan congressional action despite sharp differences over fiscal policy — such as Democratic opposition to GOP President Donald Trump's tax overhaul.
"We're not going to let them off the hook," said Representative Hakeem Jeffries of New York, a member of House leadership. Senate Majority Leader Chuck Schumer said every Democrat is "outraged" at GOP opposition to suspending the debt limit.
2. It's Complicated
After the continuing resolution-cum-debt-limit-suspension fails, Democrats have other fiscal action to focus on. Schumer and House Speaker Nancy Pelosi have to unite their caucus's progressives and moderates over what's now a $3.5 trillion bill to expand social spending, paid for in part with tax increases. Pelosi has also promised a Sept. 27 vote on a bipartisan $550 billion infrastructure plan, which has already passed the Senate.
Financial market stress may start to rise as Republicans and Democrats blame each other for leaving the federal government on course for a shutdown and a default. Financial-industry heavyweights have already weighed in with calls for swift action. And stocks slumped on Monday in part thanks to worries over the debt limit's approach.
3. Shutdown
If Democrats stick to their strategy and Republicans stay dead set against it, lawmakers could cause a government shutdown after Sept. 30, something that's happened for varying stretches several times since 1995. That could in turn escalate fears about a default once the Treasury runs out of space through its so-called extraordinary measures to avoid breaching the debt limit.
Treasury bills maturing in October to November are trading at a discount compared with those due outside that range, as traders price in the chance of turmoil around the time the Treasury runs out of cash. That discount could expand, and stocks could tumble, as the game of chicken continues.
