10.02.202313:00 Forex Analysis & Reviews: What does the debate on raising the debt ceiling mean for the markets?

The issue about raising the US government debt ceiling is becoming a political drama as the parties fail to reach a bipartisan agreement.

The US reportedly reached a borrowing limit of $31.4 trillion at the end of January, so the Treasury began implementing emergency measures, including suspending investments in individual government accounts, to pay all of the country's bills. If the debt ceiling is not raised by June, then the government will truly run out of money. That is why calls from US President Joe Biden, Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell have become increasingly desperate.

On Monday, Yellen once again called on Congress to raise the US national debt limit, warning that failure to do so could cause economic and financial disaster. On the following day, Powell said investors should not expect the Fed to protect the US economy if the debt ceiling is not raised in time. He also ruled out the idea of a trillion-dollar coin and stressed that there is only one way to solve the problem - if Congress raises the national debt ceiling in time. Biden also called for unity among Republicans to raise the national debt ceiling.

In a first attempt to resolve the issue, Republican House Speaker Kevin McCarthy and President Joe Biden met last week, but the stand-off continued as they agreed to meet again. Republicans have made it clear that they would like cuts in federal spending in return for a cap increase.

Analysts warn that the path to a higher debt ceiling could be precarious as the last time the debt ceiling debate significantly affected markets was in August 2011, when Republicans and Democrats failed to agree and ended up raising the ceiling just hours before the deadline. Back then, risky assets caused a negative reaction as dollar fell, equities fell and credit spreads widened.

A similar scenario is not ruled out this time as negotiations to raise the government debt ceiling are just beginning. While politicians are struggling, analysts expect increased market volatility, especially closer to the June deadline.