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MM spent the past week talking with big banks and asset managers to get a sense of how worried they are about the fight over the debt limit. We brought you the increasingly pessimistic view. But not everyone on Wall Street is freaking out.
At the other end of the spectrum are analysts like Ralph Axel, rates strategist at Bank of America.
To be sure, Axel believes the risk of the U.S. defaulting on its debt is higher than it has been in years. He thinks it’s likely that a protracted political stalemate over raising the government’s borrowing authority will prevent the U.S. from paying some of its bills for a couple days or a few weeks later this year.
But he doesn’t think the government will fail to pay its bondholders, and that’s because of the “P” word(s) — payment prioritization.
It’s a long-rumored and much speculated-about process in which the U.S. would keep paying bondholders while lapsing on other financial obligations. Avoiding a default on government bonds is critical because of the foundational role that Treasury securities play in the functioning of the global financial system.
Treasury was poised to release such a prioritization plan during the 2011 debt limit fight, according to Wall Street Journal reporting at the time. Treasury later revealed to House Republicans in 2014 that the government would be technically capable of doing it but that “this approach would be entirely experimental and create unacceptable risk to both domestic and global financial markets.”
Conservative Republicans are planning to push the idea while they fight for spending cuts in exchange for a debt limit increase, the Washington Post reported Friday night. White House Chief of Staff Ron Klainswatted down the concept this weekend, warning it would create “CHAOS in the US” with cuts to food safety, FAA operations and border security. Treasury declined to comment on whether it was an option when asked by MM last week. The department’s assistant secretary for financial markets, Josh Frost, gave a detailed speech in December about how debt limit standoffs strain Treasury’s cash balance and stir market volatility.
But Axel says there’s a “strong belief” within the financial community that Treasury has a payment prioritization plan. He says that the department should be more forthcoming about what it can and can’t do. Treasury Secretary Janet Yellen didn’t acknowledge those capabilities in her letter to Congress last week warning that the U.S. would hit its borrowing limit this Thursday. She said Treasury would probably be able to keep paying the government’s bills using cash and extraordinary measures until at least early June.
“The Treasury Department has a public safety role to play right now,” Axel told MM, adding that “they need to tell everybody what the real deal is with the Treasury market and whether or not this is a true massive threat or if it’s actually completely benign, which I think it is.”
Such a disclosure would surely embolden Republicans holding the debt limit hostage, though the WSJ editorial board warned Monday night that it would let Democrats highlight what isn’t being funded.
Axel also questions whether the broader economy would suffer a hit to GDP from a temporary disruption in government spending.
“To me, the market pressure and the economic pressure are potentially very, very low, and the political pressure seems to build in favor of the Republicans over the Democrats,” Axel said. “All kinds of other unforeseen things are possible here, but I think it concludes with a pretty big win for the Republicans relative to their quote unquote past winnings. They’re obviously desperate.”
Flying solo — Sam Sutton is taking a well-deserved break this week. So please send tips and debt ceiling hot takes to [email protected].
Driving the week … World leaders meet in Davos … The House and Senate are out this week … The U.S. Conference of Mayors meets in Washington Tuesday to Friday … Acting Comptroller of the Currency Michael Hsu talks “too big to manage” at Brookings Tuesday at 2 p.m. … Sen. Bernie Sanders gives a speech on the state of the working class at the Capitol Tuesday at 7 p.m. … Yellen meets with People’s Republic of China Vice Premier Liu He in Zurich Wednesday morning … Fed Vice Chair Lael Brainard discusses the economic outlook at the University of Chicago Thursday at 1:15 p.m. … Fed Governor Christopher Waller also shares his economic outlook at the Council on Foreign Relations in New York Friday at 1 p.m.
Davos roundup —
— U.S. lawmakers tell Europeans: We’re not protectionists — POLITICO’s reporters on the ground in Switzerland caught up with members of Congress attending this week’s World Economic Forum. While U.S.-EU tensions are rising because of Washington’s new clean-energy subsidies, lawmakers plan to make the case to EU counterparts that stronger energy and economic security in the U.S. is good for Europe.
— Who’s not coming to Davos — Our Ryan Heath reports that top-tier leaders are absent from this year’s elite gathering in the Alps, including Joe Biden, Xi Jinping, Vladimir Putin, Emmanuel Macron and Rishi Sunak.
— The race to succeed Klaus Schwab— Ryan also has a deep-dive into the frustrations surrounding the succession planning for the World Economic Forum’s 85-year-old founder.
— Want more Davos coverage? — Read our special Davos Playbook.
Yellen to meet China’s finance minister— The U.S. Treasury secretary is scheduled to meet in Switzerland Wednesday with her Chinese counterpart, Vice Premier Liu He. It’s her first in-person meeting with Liu since taking office.
Sherrod Brown attracts first GOP challenger in key ‘24 race— NBC reports that Matt Dolan, who lost Ohio’s Republican Senate primary last year, will announce this week that he plans to try to unseat the Senate Banking Committee chair.
MM interview: The British Treasury’s Griffith says ‘stability is back’ — MM sat down with U.K. Economic Secretary to the Treasury Andrew Griffith last week while he was in the U.S. for a round of meetings in Washington and New York. It was his first international trip in the role.
A big part of his agenda was to convey stability after recent political and economic turmoil surrounding Britain’s leadership.
— Griffith’s big message to Washington officials — “I want to reassure them that the U.K. is in a good underlying economic position, which it is. … I expect us to grow over the medium term.”
Griffith met with Treasury Deputy Secretary Wally Adeyemo, SEC Chair Gary Gensler, CFTC Chair Rostin Behnam and Fed Governor Michael Barr.
— The U.K. approach to financial regulation post-Brexit and Ukraine — “The agendas that we’re all dealing with are how you get that regulation appropriate — how you protect consumers, how you protect the financial system from externalizing risk and putting that onto the taxpayer, but also make sure you can grow. Fundamentally, our job is to drive economic growth and prosperity for our citizens.
“It’s not easy in a values-based world, where we’re having to look at how we trade with Russia, potentially how we continue to do business with China but in perhaps a different way that’s driven more by our shared values.
“That puts a premium … on making sure that we get the right balance of regulation so that your great firms, you know, Wall Street, can do business in London, they can use that as one of their international hubs, and we can do that in a way that puts as few unnecessary frictions in their way as possible.”
(Key context: The U.K. government has laid out a regulatory revamp known as the Edinburgh Reforms intended to repeal and replace “burdensome” retained EU laws governing financial services. Griffith told MM it’s about “sensible changes to the rulebook, not a race to the bottom, not even wholly deregulatory, just better regulation that allows people to operate well.”)
— The U.K. pitch to Wall Street — “After a period of political turbulence, stability is back. We’ve got a new prime minister, a new team. They’re here for the long term. They’ve got a clear set of plans that’s going to make the U.K. economy a great place to invest.”
Griffith’s U.S. itinerary included meetings with Blackstone, NYSE, Bank of America, JPMorgan Chase and Brevan Howard.
— The U.K.’s response to its mini-financial crisis in September — “We need to look at the precise pension issues, but in a way to me it was an example of how the system could work. The Bank [of England] working in partnership with the Treasury made a time-limited intervention. That intervention worked. … There will be a number of reviews to look at lessons learned. Undisclosed leverage is always a challenge to prudential financial systems. That is a shared objective just to make sure that that it is understood and it’s transparent wherever it can be.”
— Crypto priorities — “Fiat-backed stablecoins that are used for payments are … the most here and now. …
“I will shortly be issuing a government paper on our general approach to the regulation of crypto assets, which will be some, not none. So we’re moving into a world where it will start to be a little bit more regulated. …
“We’re looking at financial promotions [aka advertising] as something probably very relevant to FTX. …
“And simultaneously we’ll also be coming out with a discussion document about how one would look at a sovereign digital currency. … It’s a really good example of where I’d like to move as much as possible in lockstep with the U.S.”
A Rodge Cohen convo for your ears—IntraFi’s Rob Blackwell has a new podcast interview with Sullivan & Cromwell senior chair H. Rodgin Cohen. They cover bank mergers, bank-fintech partnerships, crypto and more.
Watchdog group presses OCC on Wells Fargo clampdown— Americans for Financial Reform is marking this afternoon’s “too big to manage” speech by Acting Comptroller of the Currency Michael Hsu by urging the OCC to take a hard line with banks that repeatedly break the law – Wells Fargo in particular. “As Wells Fargo’s main supervisor, the OCC is in a unique position to identify the structures at the megabank that result in repeated rampant abuses and impose lasting change – including structural change,” said Sarah Pray, AFR’s managing director for policy.
Key SEC official to exit — POLITICO’s Declan Harty reports that Renee Jones, who has helped steer some of the most significant regulatory reforms underway at the SEC, will step down as the agency’s Corporation Finance division director in February. The Boston College law professor will return to academia. Her successor will be the division’s deputy director, Erik Gerding.
CFPB eyes rules for overseas money transfers — The CFPB is considering new restrictions on fees for wiring money internationally, WSJ reports.
China’s population falls for first time in decades— NYT: “The world’s most populous country has reached a pivotal moment: China’s population has begun to shrink, after a steady, yearslong decline in its birthrate that experts say will be irreversible.”
Banks struggle to leave Russia— FT: “Advisers to western banks trying to exit Russia say a law introduced by Vladimir Putin is disrupting sales and allowing deals to be hijacked by business people close to the Kremlin.”
Binance tries to calm big investors— Bloomberg: “Binance, the operator of the world’s biggest crypto exchange, will allow institutional investors to keep the collateral for leveraged positions off the platform, a move to ease concerns caused by the collapse of one-time rival FTX.”
Better Markets has a new warning on monetary policy— From a report the Wall Street watchdog group released this morning: [T]he scale and scope of risks facing policymakers today didn’t start with the 2020 Pandemic Stress or Russia’s attack on Ukraine in 2022. It started with the Fed’s overly accommodative policies that were initially conceived of, launched, and implemented in response to the 2008 Crash with few if any reasonable checks along the way assessing risk taking, moral hazard, mis-formation and misallocation of capital, or other collateral consequences.”