2025 US Debt Ceiling Showdown

Default Is Not an Option

January 09, 2025

If Congress cannot forge a compromise on the US debt ceiling, then the unlikely scenario of default will occur. This report examines why the debt limit breach would probably cast the US and the global economy into recessions in the short run and raise borrowing costs for the US over the long run, rendering it an option that Congress should never consider.

• If Congress and the president do not agree on a path for the debt ceiling before the US Treasury runs out of cash to operate the federal government, then the US will experience a sovereign debt default.
• Default would likely result in an instantaneous US recession as the entire government would probably shut down, and potentially a global recession given the US Treasury market’s critical role in the global bond market. Economic impacts might rival COVID’s.
• Default would certainly stoke major US sovereign debt ratings downgrades by ratings agencies spanning the globe, which would raise borrowing cost and potentially accelerate and exacerbate currently nascent attempts at de-dollarization among select economies.
• Given the devastation that would follow, default is a gray swan (i.e., a high-impact but extremely low-probability event) that Congress is highly unlikely to allow, even if a debt ceiling deal is passed at the last minute, and potentially for some cost.