Delaware, US await answers in potential debt ceiling agreement

On Saturday evening, it was announced that the White House and GOP leaders had reached a tentative agreement on the debt ceiling. The details of the compromise were being reviewed by the parties Saturday night and still has to be voted on by the House and Senate.

But with June 5 set as the “X-date” for the federal government to resolve the crisis, a potential default could have widespread ramifications for everyday Americans.

If no compromise is officially made and the government does not honor its financial obligations, a range of payments could not be made on time, including Social Security, Medicare and veterans’ benefits.

James Butkiewicz, professor of economics at the University of Delaware, said the U.S. Treasury likely has a contingency plan in place, although the details are unclear.

Mr. Butkiewicz said there is a chance the government could “find some other ways to come up with the money to carry this out another couple of weeks,” if a compromise is not made by June 1.

“There will be some decisions as to what payments will be made and what payments won’t be made, because clearly, the revenue coming in is not as great as the money we’re spending,” he said.

In addition to health care, retirement and pension payments, the federal government could also have the inability to fund interest on debt and payments to vendors, he said.

A default could cause immediate uncertainty, Mr. Butkiewicz said, noting that he expected the government to eventually honor all of its payments.

Though President Joe Biden has been in favor of raising the $31 trillion debt ceiling, House Republicans have refused, citing the need for a commitment to cut existing and future spending before upping the ceiling.

Mr. Butkiewicz said there has been “a lot of negotiations, but a lot of political posturing,” and that, while there were no political squabbles over the debt ceiling for decades, things have changed as politics have become more polarized.

“It could be a real problem if we don’t make some of the payments, because people lose confidence in the government,” Mr. Butkiewicz said. “Our debt is considered to be the safest debt in the world. That’s at stake.”

Should the country default on its financial responsibilities, the U.S. dollar would likely become less attractive internationally, he said, adding that resulting higher interest rates could then lead to even bigger deficits,

“The U.S. dollar is still the primary asset that a lot of people around the world hold up as an asset,” Mr. Butkiewicz said. “People might not be so willing to hold our debt and may have more interest in other countries’ debt as a reserve asset. The U.S. is heavily involved in international trade, with a lot of trade being built in (U.S.) dollars.”

As a compromise on the debt ceiling appeared in reach late Saturday, Mr. Butkiewicz said there are two primary questions to consider: how much the debt ceiling could be potentially raised and how much the country’s deficit would be after a deal is struck.

“The more they bring the deficit down, and the bigger the increase in the ceiling, the farther out in the future we push this,” he said. “If the increase in the ceiling is not that large and the deficit remains large, I mean, we could be bumping up (to the debt ceiling) in a year or two.”

Delaware’s investment portfolio holds approximately $2.3 billion in U.S. Treasuries, and a federal default could result in significant loss if an agreement is not reached.

Though uncertainty remains, State Treasurer Colleen Davis said her office has developed strategies “to buffet the tide of financial turmoil in Delaware.”

“What’s important to know is that Delaware has resources to meet its financial obligations in the near term without the money from the U.S. Treasury holdings,” Ms. Davis said. “We will continue to monitor negotiations in Washington and urge our leaders to come to an agreement.”