Tentative debt ceiling agreement reached, we're continuing to monitor progress

You’ve likely seen news about the ongoing debt ceiling discussions between members of U.S. Congress and Joe Biden and his administration. Progress was made over the weekend in reaching a tentative agreement to ensure cash flow continues to cover bills, federal worker pay and other critical obligations over the next two years while lawmakers work on longer term budget reform. The tentative debt ceiling default avoidance deal is not final until the U.S. House of Representatives and Senate both approve.

According to news reports, the earliest a vote could have been taken is May 31, allowing congressional leaders a required 72 hours to review the entire proposal. While we are optimistic the agreement will be signed and enacted before a critical debt ceiling default deadline projected in early June, we will continue to closely monitor and plan for steps we would take to support impacted clients, if needed.

Here’s what you should know about the issue, potential impacts and how we’re preparing.

What is the debt ceiling? The U.S. debit limit (ceiling) of $31.3 trillion was raised by $2.5 trillion in December 2021. That raise lasted until January of this year, according to U.S. Secretary of the Treasury Janet Yellen, and the government has since been taking “extraordinary measures” to manage the country’s funding position. The government has essentially been cash flowing operations (operating expenses, as well as debt and interest payments) with routine inbound cash such as tax receipts.

What happens if the debt ceiling is not raised? It’s projected by Secretary Yellen and the Congressional Budget Office that, without an additional raise or suspension of the ceiling approved by Congress, the Treasury won’t be able to continue paying the nation’s bills, and the U.S. could default on its financial obligations as of early June.

How would that impact our company? Client impacts would create a ripple effect for the bank, including delays in clients’ ability to make various credit payments and could impact deposit levels. Credit availability would likely tighten across the industry as all react to the government failing to fully meet their obligations.

A Moody’s Analytics report released earlier this year estimates a default having Great Recession-level impacts, including a 4% gross domestic product (GDP) decline, six million jobs lost, a higher than 7% unemployment rate and a possible $12 trillion loss in household wealth as stocks lost as much as one-third their value.

When the agreement is reached and the debt ceiling is raised, there is speculation of some residual industry impacts. The U.S. Department of the Treasury will have to replenish the Treasury General Account, which has been drained as part of the extraordinary measures. This will likely occur through T-Bill issuance, possibly pushing rates higher – which could potentially result in more headwinds on deposits across the industry.

How would that impact our clients and how would we help? Consumer, wholesale and wealth clients could all be affected a bit differently. Generally, without a debt ceiling raise by whatever is ultimately determined to be the critical deadline, payments including Social Security, federal civilian employees and military payrolls, veterans’ benefits and utility bills could be delayed, partially paid, or even suspended. Clients could see delays in anticipated payments for tax refunds and/or tax credits. Increased interest rates for Treasuries could have broader economic impacts across credit markets, like higher credit card, auto loans and home mortgages. Wholesale clients could see delayed government contract payments. And wealth clients could experience unexpected liquidity impacts for those with significant government contracts and/or government-issued securities in their portfolios.

We are carefully considering steps that could help clients bridge any short to moderate term hardships and will have those solutions in place should we need to respond.

Synovus Corporate Communications