Navigating the Uncertainty of the Debt Ceiling: Major Consequences Facing Your Company

June 1, 2023. The X-date. The date U.S. Treasury Secretary Janet Yellen now predicts the country will run out of cash to fulfill its financial obligations. In less than a month, unless Congress increases the debt cap, the U.S. will not be able to raise additional debt to finance government operations - potentially inducing a financial crisis.

What is the debt ceiling?

The debt ceiling is the legal limit on the amount of money that the U.S. government can borrow to finance its operations. The debt ceiling was established in 1917 during World War I to allow the U.S. government to issue bonds to fund the war and set a limit on the amount of debt the government could take on. Congress sets the debt ceiling, which has been raised and/or suspended many times since it was introduced. The current borrowing cap of $31.4 trillion was passed in 2021 and the government hit that limit this past January. Since then, the US Treasury has been delaying a default by taking special accounting measures to have enough money to keep paying its bills.

Why does the debt ceiling have to increase? The U.S. government has had a budget deficit for many years - meaning the government spends more money than it takes in through taxes and other revenue sources. To make up for the difference, the government sells U.S. Treasury debt to fund its operations including military, social security, and interest payments to U.S. bondholders. If the debt ceiling is not raised or suspended, the government cannot borrow more money to pay its bills, which could translate to serious consequences for the U.S. economy.

What are the consequences of not raising the debt ceiling?

A failure to raise or suspend the debt ceiling could cause a government shutdown disrupting operations and impacting the entire economy. This may lead to a slowdown in economic growth, a decline in consumer confidence, and a drop in the stock market. 

Failing to raise the debt cap may also lead to a default on U.S. government debt resulting in undesirable repercussions for the financial market. U.S. government debt is considered one of the safest and most stable investments in the world, and many financial institutions have U.S. government bonds as a part of their portfolios. If the U.S. government defaults on its debt, it would create significant risk in the financial markets, possibly inducing a financial crisis and triggering a recession.

Furthermore, not increasing the debt ceiling could lead to a downgrade in the U.S. government’s credit rating which would have a domino effect throughout the entire economy. The credit rating of the U.S. government serves as a benchmark for many financial instruments. A downgrade would lead to higher borrowing rates for companies and individuals. When this occurred in 2011, Congress did not resolve the debt ceiling in a timely manner leading to a near-default on U.S. government debt and a downgrade in the government's credit rating by Standard & Poor’s, for the first time in history. At that time, the market volatility caused stock prices to drop, and borrowing costs to climb, making it more expensive for companies to get loans for investments – ultimately slowing economic growth.

For all these reasons, timely action by the legislative and executive branches are needed to avoid an economic chaos in the U.S. that could ultimately spread into a global financial crisis. There have been a few times when Congress has delayed raising the debt ceiling and each of those cases resulted in financial market volatility and uncertainty.

Could your industry be affected?

Yes. Every industry from retail to manufacturing could be directly or indirectly affected if the debt ceiling is left unresolved, but the financial and business services industry would be especially affected. Banks, investment firms, insurance and other financial institutions depend heavily on the stability and predictability of the U.S. financial system and any disruption or uncertainty could have serious consequences on their operations and profitability.

Impact on other industries:

•  Healthcare: The government is a major funding source for programs like Medicare and Medicaid. This would impact the ability of healthcare providers to deliver medical services for millions of Americans.
• Retail, consumer goods & transportation: Disruptions or uncertainties in the economy could change consumer spending and buying behaviors resulting from increased prices for goods and services.
• Technology: With even more uncertainty looming, companies may turn to additional layoffs as a survival method to cut costs when revenue and profits decrease.
•  Defense: The government is a major purchaser of defense equipment and services. This could disrupt funding for defense contracts, impacting the operations and profitability of defense contractors and potentially national security.

The debt ceiling issue would touch many industries, if not all, and have tremendous implications for both the U.S. economy and the global financial system.

Planning enables agility during uncertainty

You can’t control the debt ceiling, but a connected approach to planning can provide a clearer path through the volatility caused by it. Data-derived decisions – not decisions based on guesses – are critical during market turbulence and access to holistic and timely data and metrics is imperative during a volatile business environment. Having a clear picture of deposits, withdrawals, cash flow, expenses, capital structure, asset portfolio, supply chain, sales performance, and workforce enables you and your team to collaborate and make better decisions as you navigate uncertainty.

In an uncertain economic environment, financial services companies may need to modify their business strategy. Banks could tighten their lending standards and reduce the amount of credit extended to borrowers to manage risk exposure. They could also stress-test their portfolio to identify vulnerabilities and design plans to mitigate them. Likewise, insurers may adjust their underwriting and claims processes and change policy pricing to reflect higher risk and stress-test for weaknesses.

Your planning needs to be agile and requires a solution that can give you that ability. It should allow you access to real-time data, extract insights, and perform as-needed forecasts to align with the fluidity of business. It should let you perform on-the-fly scenario analysis based on market conditions. And it should let you automatically generate reports to executives and the board so you can get buy-in on actionable steps to drive better outcomes.

Want to come out on top in uncertain times? Anaplan models can be implemented in just weeks and empower you to see, plan, and lead your business intelligently, and confidently, through economic ups and downs.

Explore our solutions for Financial & Business Services organizations.