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Goldman Sachs warns of a 'real risk' that America could default on its debt

Goldman Sachs warns of a 'real risk' that America could default on its debt

Concern is rising on Wall Street over Washington's debt ceiling game of chicken. Goldman Sachs warned clients on Wednesday that Congress may fail to raise or suspend the debt ceiling prior to the October 18 deadline.
"It looks unlikely that Congress will address the debt limit before the last minute, and there appears to be a material risk that Congress fails to act by the October 18 deadline," Goldman Sachs economists wrote in in a note.

The Wall Street bank added that a "lapse in borrowing authority looks like a real risk," although that lapse would "probably be brief."

It's important to note that the Goldman Sachs warning was published prior to news that Senate Minority Leader Mitch McConnell is weighing two ideas to offer Democrats on addressing the debt limit. One option would be a short-term raise of the debt ceiling, a Republican source told CNN's Manu Raju.

Treasury Secretary Janet Yellen on Wednesday reiterated that if the debt ceiling is not raised, the federal government will run out of cash and face extraordinary measures by October 18. After that date, Treasury would have very little cash to pay the nation's bills.

"While not our base case, we also believe there is a real risk that Congress will miss the deadline," Goldman Sachs economists wrote in the report.

Goldman Sachs is not putting much stock in any unilateral actions the Treasury Department could take to address the debt limit, including minting a $1 trillion coin or disregarding the limit by citing the 14th Amendment.

"It is impossible to rule these or other steps out entirely, but we are skeptical that such moves will come into play this year," the economists said in the report.

The most likely option to address the debt crisis, according to Goldman Sachs, is a standalone debt limit increase through reconciliation — a process that Democratic leaders have argued against.

One big disadvantage here is that it would likely force Democrats to specify a new dollar amount for the debt limit, probably near $31 trillion, instead of just suspending it, Goldman Sachs said.

"Of course, these disadvantages are the reasons Republicans would like to require Democrats to use it. Nevertheless, this seems like the most likely option at the moment," the economists said.

Goldman Sachs stressed that any lapse in borrowing authority would likely be brief because "the public and financial market response would likely force a quick political resolution."

If Congress misses the deadline, Goldman Sachs said Treasury would likely continue to pay principal and interest on Treasuries but stop other payments that everyday Americans rely on.
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