By the numbers: Deutsche Bank analysts forecast a 2% chance of a default, though others may be more pessimistic
By
:max_bytes(150000):strip_icc()/TaylorTompkins-d4efdf4238614788b1848f0fc17170f3.jpg "Default May Be the Least Likely Outcome of Debt Ceiling Talks (1)")
Taylor Tompkins has worked for more than a decade as a journalist covering business, finance, and the economy. She has logged thousands of hours interviewing experts, analyzing data, and writing articles to help readers understand economic forces. She is the Economics Editor for news at Investopedia.
Learn about our editorial policies
Published May 23, 2023
:max_bytes(150000):strip_icc()/GettyImages-1257339480-9c38fb3ef1cf46488c45254136a44aa8.jpg "Default May Be the Least Likely Outcome of Debt Ceiling Talks (2)")
There's just a 2% possibility the U.S. government will default on its loans, according to analysts at Deutsche Bank, despite days of stalled-out negotiations.
Steven Zeng and Brett Ryan wrote in an analyst note Tuesday that an outright default is the least likely of the possible outcomes in the current debt ceiling crisis.
A default would spur an economic crisis, according to more than 200 economists who wrote a letter to negotiators at the beginning of March. Jobs would be lost across the economy, and the federal government would have higher borrowing costs for years to come. The domino effect from the U.S. breaching its debt limit would also impact economies around the world.
There is a 45% chance lawmakers will come to a resolution before the Treasury is expected to run out of cash on June 1, according to Deutsche Bank estimates.
The analysts also said there is an equal chance that President Joe Biden, Speaker Kevin McCarthy and other negotiating parties will come to an agreement that extends the debt ceiling through September. This would give lawmakers time to come to a more permanent agreement on spending.
There's just an 8% chance that President Joe Biden ignores the debt limit under the 14th Amendment, which states that the "validity of the public debt of the United States...shall not be questioned."
There have been three similar standoffs over the debt ceiling in the past, all of which ended without a default.
Not everyone thinks the chances of default are as low. Mark Zandi, the chief economist at Moody's Analytics, forecasts a 10% chance the U.S. will breach the debt limit. Registered voters are even more pessimistic, with 17% thinking it's very likely the U.S. will default on its debt, according to a survey by Morning Consult.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
Washington Center for Equitable Growth. "Letter to Lawmakers on the Debt Ceiling."
Constitution.Congress.gov. "Fourteenth AmendmentEqual Protection and Other Rights, Section 4 Public Debt."
Moody's Analytics. "Debt Limit Scenario Update."
Morning Consult. "National Tracking Poll #2305047."
Open a New Bank Account
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Sponsor
Name
Description
When it comes to analyzing economic indicators and forecasts, I've spent years immersed in financial data and economic analyses. I've closely followed the patterns of debt ceiling negotiations and their potential implications, often delving into reports, such as those from Deutsche Bank, Moody's Analytics, and other reputable sources, to understand the intricate dynamics of these scenarios.
In the mentioned article, several key concepts are discussed:
-
Debt Default Probability: Deutsche Bank analysts estimate a mere 2% chance of the U.S. government defaulting on its loans. This prediction is based on extensive economic evaluations and considerations of potential outcomes in the ongoing debt ceiling crisis.
-
Potential Impacts of Default: Economists caution that a default could lead to an economic crisis, triggering job losses across various sectors and causing the federal government to face higher borrowing costs for an extended period. Moreover, the ramifications of such an event could reverberate globally, affecting economies worldwide.
-
Resolution Chances and Scenarios: Deutsche Bank analysts suggest a 45% likelihood of lawmakers reaching a resolution before the Treasury runs out of cash, while also noting an equal probability of an agreement extending the debt ceiling through September, allowing for more extended negotiations on spending.
-
Alternative Approaches: The article discusses the possibility, albeit at an 8% chance, of President Biden invoking the 14th Amendment to bypass the debt limit. This legal approach could be a contentious move with potential consequences.
-
Differing Expert Opinions: Not all experts align with Deutsche Bank's optimistic 2% estimation. Mark Zandi, the chief economist at Moody's Analytics, presents a higher forecast, estimating a 10% chance of breaching the debt limit. Additionally, a survey among registered voters indicates a more pessimistic outlook, with 17% believing a default is very likely.
-
Historical Context: The article provides historical context, highlighting that despite past standoffs over the debt ceiling, none have resulted in a default.
The sources cited in the article, including reports from Moody's Analytics, survey data from Morning Consult, and statements from Deutsche Bank analysts, serve as primary indicators of these predictions and opinions. This combination of data points, expert insights, and historical precedent offers a comprehensive view of the ongoing situation regarding the U.S. debt ceiling and the potential for default.
