Why is Wall Street worried about US debt ceiling?

House Speaker Kevin McCarthy traveled to the New York Stock Exchange Monday to deliver a warning to Wall Street about the debt ceiling crisis.

There is a growing chance Washington “will bumble into the first default in our nation’s history,” the Republican said on his 100th day as House Speaker, adding that he wanted to raise the alarm for the financial world, which has downplayed the issue in recent months.

After a first sit-down meeting in February, McCarthy and President Joe Biden have settled into a standoff over the issue with little communication in the last 75 days with an historically ugly and market-rattling debt limit fight possibly coming within weeks.

The White House responded by labelling the speech risky, and in a statement, Deputy Press Secretary Andrew Bates claimed that McCarthy “is holding the full faith and credit of the United States hostage” by not putting forth a plan that Republicans can support.

Despite the fact that the financial markets have closely followed the debt ceiling drama, investors continue to bet that the chances of a government default are slim.

Morgan Stanley Capital International keeps tabs on trading activities in credit default swaps to track investor sentiment on this front. By this metric, the probability of default increased from 3.3% at the start of the year to 11.3% as of February 24. However, it still implies that investors believe a default to be less likely to occur.

McCarthy stated in his address that House Republicans will attempt to pass a plan to raise the debt ceiling without the White House’s approval in the upcoming weeks. The proposal is likely to adopt universal spending caps, postpone the debt ceiling for a year, and cover other GOP priorities like new energy laws.

However, even if McCarthy is able to come to an understanding with his contentious House GOP colleagues, the measure will undoubtedly be rejected by Senate Democrats and the White House.

Furthermore, it’s still not obvious how McCarthy would put these severe budget cuts into effect without seriously impacting politically popular programmes like Social Security, the Department of Veterans Affairs, or the Pentagon, which the Speaker reiterated on Monday wouldn’t be subject to significant cuts.

The White House stated that it would only engage in discussion when McCarthy presented a comprehensive budget plan of his own in March.

McCarthy nevertheless made an effort to emphasise Monday that the president is to blame. In the first 100 days since being elected Speaker, he declared, “I hope America has learned one thing about me: I will never give up.”