The debt ceiling crisis has been averted—but this short-term relief might come at the cost of greater future peril. Franklin Templeton Fixed Income CIO Sonal Desai analyzes the debt-ceiling resolution and delves into the potential longer-term risks that rising public debt poses to financial markets.
The debt ceiling crisis has been averted, and this should be cause for unalloyed celebration. The bipartisan agreement was reached just a few days before the June 5, 2023, deadline that US Treasury Secretary Janet Yellen stated as when the government would likely be unable to meet all its obligations.
The debt ceiling agreement removes an important uncertainty from the horizon, which is positive for financial markets, the economy, and the US international standing. And it does so without imposing a major fiscal tightening, which might have caused growth concerns. All this is certainly good news.
The long-term risks linked to the fiscal outlook, however, have in my view become bigger, and market participants would do well to keep this in mind. Let me explain:
- The long-term fiscal picture is not getting any better. Based on International Monetary Fund (IMF) data, at the end of last year, US general government debt stood at over 120% of gross domestic product (GDP), twice the pre-global financial crisis (GFC) level (2007) and higher than most European Union (EU) countries. The IMF projects it will approach 140% of GDP by 2028. If we look at debt held by the public,1 the measure more often used in US domestic discussions, the numbers are a bit lower, but the trend looks equally worrying. It stood at 35% of GDP before the GFC, reached 97% of GDP last year, and looking forward, the Congressional Budget Office (CBO) projects it to reach 120% of GDP by 2033 and close to 200% of GDP by 2053.2 (Caveat: the latest CBO budget outlook was released last February and predates the debt ceiling agreement.)