Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our s each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Markets might not show it yet, but there is growing concern among financial giants that the upcoming debt ceiling fight between conservative Republicans and the Biden administration poses a real threat to the economy. For those like Elliot Hentov, head of policy research at State Street Global Advisors , it’s a realization that the incentives for a crisis are high, with no obvious scenario where conflicting sides will back down. Conservative GOP lawmakers who want spending cuts are emboldened after Kevin McCarthy’s speaker election, while Democrats and a number of moderate Republicans are resisting attempts to hold the U.S. debt limit hostage. The “X date” for when the federal government won’t be able to pay its bills is uncertain but is estimated to happen around the middle of the year. It’s unlikely the U.S. will miss a debt payment , Hentov told MM. But he sees a real risk — unlike in past debt ceiling brawls — that the standoff will last so long that the Biden administration will be forced to use murky legal maneuvers to keep paying the government’s bills, casting uncertainty over a bedrock element of the global financial system. (The White House has said it’s not considering measures to go around Congress, like minting a $1 trillion coin or invoking the 14th Amendment.) Hentov’s concern is that unexpected dominoes may fall like they did during September’s U.K. financial crisis, when a dramatic tax-cutting proposal by the Truss government triggered a hike in bond yields and blew up pension funds. “In all the previous debt ceiling episodes, I always felt like at the end of the day, I understood the need for the theatrics, but I could see a landing zone for how it gets resolved,” said Hentov,who worked on the S&P sovereign ratings team when the firm downgraded the U.S. in 2011. “Here, I don’t see that yet, and it makes me quite uncomfortable.” What to watch — Given the political constraints, Hentov said he expects markets will start reacting to a potential debt ceiling breach earlier than in the past, probably two months out from any deadline that Treasury Secretary Janet Yellen indicates to Congress. Look for a letter from Yellen to lawmakers in the near future. Market turbulence could come in the form of rising interest rates for Treasury securities that mature around the deadline. A spike in short-term rates would make borrowing across the economy more expensive. Why PIMCO is optimistic — Libby Cantrill, head of public policy at bond trading giant PIMCO, told MM that the firm is not significantly more worried about a debt ceiling breach than it was before the speaker election drama. PIMCO believes there will be enough votes for a “clean” debt ceiling increase thanks to support from Democrats and some moderate Republicans. A so-called discharge petition would be a last resort to force a House vote even if McCarthy refused to bring up a bill. “For the market’s purposes, as long as there is that release valve – a mechanism to force a clean debt ceiling increase – we are not exceedingly concerned about the chances of a default,” Cantrill said. Here’s hoping we avoid a worst-case Wednesday – How do you think the debt ceiling debate will play out? Let us know at zwarmbrodt@politico.com and ssutton@politico.com.
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