Debt ceiling crises are old hat for the American public. Ever since the Republican Party took over the House of Representatives, it has seen the debt ceiling as the single best negotiating tool for forcing the president and the Democratic Party to accept budget cuts and other measures they wouldn’t otherwise support.
This tactic has yielded mixed results: in 2011, it lead to the Budget Control Act, which lopped off nearly $1 trillion in spending growth over the course of 10 years. The 2013 debt ceiling fight was less successful for Republicans: they shut down the government, demanding that the president agree to strip funding for Obamacare. But after polls showed that voters blamed the GOP for the discord, Republicans gave in and allowed the debt ceiling to be raised with mostly Democratic votes.
One way or another, the ceiling was raised. But this time around, the politics are different. The Freedom Caucus, a group of roughly 40 conservative Republican congressmen, are convinced that the U.S. government’s current debt trajectory will bring down the country, and they are willing to risk what they see as a partial default to force the country to become fiscally responsible. On Wednesday, the House is expected to vote on a bill that would allow prioritization of debt payments, directing Treasury to make good on debt interest payments and Social Security, and then decide what other spending commitments not to make to avoid going over the statutory debt limit.
Arch-conservatives took a similar stance the last time around, John Boehner announcement that he would be stepping down as Speaker of the House and the Republican Party’s inability to find another person to lead the party, has led political observers to call the dysfunction in Congress “unprecedented.” As Politico puts it, “Congress has never seen anything quite like the House Freedom Caucus.”
Guggenheim analyst Chris Kreuger isn’t very optimistic about the debt ceiling getting lifted without a hitch. He writes in a note to clients:
We place 40% probability for some kind of accident that would keep Congress from raising the debt ceiling in time due to brinkmanship, procrastination, or political gridlock. We believe the debt ceiling will be raised in November, but we are basing that on nothing more than blind faith and would remind investors who shrug at another debt ceiling “boy cried wolf” charade that, at the end of the book, the wolf eats the boy.
The markets, however, don’t appear to view the 2015 debt crisis much differently than they did the last two. Yields on t-bills maturing just after the November 3 debt ceiling deadline are yielding about 4 to 9 basis points more than those maturing immediately following the debt ceiling, according to Bloomberg. Looking at credit default swaps, or the insurance traders pay on bonds in case they default, the prices on U.S. government debt have remained unchanged—$14,000 to insure $10 million in U.S. debt for up to one year—for the past two weeks, according to Markit, a financial information services company. That’s a much lower price than they were going for back in 2013 and 2011, suggesting that other economic factors are driving this niche market.
In other words, the markets aren’t completely shrugging off the possibility of a debt ceiling disaster, but there isn’t much evidence that they are taking these risks seriously, even as political watchers note the increasing nihilism of a sizable portion of the Republican caucus.
Bear in mind that the Freedom Caucus is only 40 members strong, which leaves close to 400 other members of Congress who aren’t so sanguine about the effects of a debt ceiling breach. This probably explains the market’s optimism on the issue. Stanley Sun, interest-rates strategist at Nomura Securities International in New York, told the Wall Street Journal, “The default risk is almost zero … We have seen this movie many times before. The question here is how long the suspense is going to be this time.”