By Karen Pierog

(Reuters] – Wall Street investors have been relieved by an apparent truce in Congress’ debt-ceiling impasse. But analysts continue to assess the likelihood of a new crisis.

Heads of large banks and financial institutions warned legislators that the debt ceiling would be raised after Oct. 18 – the date when the government is expected to run out cash. The result will be a default.

The plan that U.S. Senate Republican leader Mitch McConnell proposed Wednesday to extend the borrowing limit until December would provide some relief but not a long-term solution.

“There will be many proposals, trial balloons and negotiations going on to resolve this issue,” said S&P Global (NYSE:) Ratings’ lead U.S. sovereign credit analyst Joydeep Mukherji in an email on Wednesday, adding that S&P’s view on the U.S. underlying credit rating has not changed.

Mukherji said in an interview that the scenario of the U.S. credit rating dropping to D from AA+ due to default was difficult to envision.

Stocks rose and Treasury yields fell on Wednesday as markets reacted positively.

NatWest analysts said in a Wednesday research note, “Two month seems like too long and we) believe the debt ceiling will be raised by reconciliation by then. We don’t expect to see the past week come December,” they wrote.

Republicans claimed that Democrats could pass a longer debt ceiling extension in the interim weeks through reconciliation. That would give Democrats the ability to use their narrow majority to get the Senate’s approval without having to rely on Republican support.

Goldman Sachs (NYSE 🙂 analysts stated Wednesday that “what seemed most likely all along” may end up being that Democrats would use the reconciliation process in order to raise the debt limit right before the deadline, after exhausting all options.

However, President Joe Biden’s and other Democrats face serious dangers.

In the interim extension plan, Democrats will have to tackle the debt ceiling problem again in December. This could make it difficult for them to pass the two major spending bills, which comprise a large part of Biden’s domestic agenda.

Mike O’Rourke, chief market strategist at JonesTrading, wrote in a note to clients that he expected McConnell to “continue to grant limited debt limit extensions right through the (2022) mid-term elections if the lack of urgency continues to slow the Democrats’ reconciliation spending bill.”

STAKES HIGH

There are huge stakes if there is no solution.

Moody’s Analytics (NYSE:) Analytics is a financial risk company that separates from Moody’s Investors Service. It stated that a default could cause a major disruption to U.S. recovery following the COVID-19 pandemic.

Moody’s Analytics pointed out that the 1979 inadvertently missed Treasury bill payments caused bill yields inexorably to rise 60 basis points. They remained high for several months and cost tens or billions. The 1979 technical default https://www.reuters.com/article/usa-debt-default/factbox-the-day-the-u-s-defaulted-idUSN1E76A0XA20110711 was blamed on check-processing glitches.

According to major credit rating agencies, the U.S. is unlikely to default. Mukherji, along with his Fitch Ratings counterpart, said that a default on any Treasury bill or note, or bond payment, even a temporary one, would cause the respective ratings of AAA-plus or AAA to drop to D.

Moody’s Investors Service rated the U.S. Aaa as stable and stated that it expected a minimal impact on its rating. They would probably downgrade all U.S. Treasury securities ratings and then keep them under review until they are certain “a cure will occur.”

If a solution cannot be found to stop a cash crisis, the United States may lose yet another AAA rating. S&P famously cut the rating a notch to AA-plus on Aug. 5, 2011, in the wake of a round of political wrangling over the country’s debt.

    Major financial institutions have considered the United States an AA-plus-rated credit since October 2020, down from AAA where it stood since 2017, according to David Carruthers, head of research at Credit Benchmark, a financial data and analytics company that collates the internal credit risk views of more than 40 institutions around the world, including 15 global systemically important banks.

    Mukherji in an interview last week said that a U.S. default on a debt payment would be highly unusual as it would be a result of politics and not economic woes. It’s still the same thing.

“If you fail to pay, you’re in default.