Debt ceiling agreement is 'still pretty far apart' in select areas, expert explains

Stifel Chief Washington Policy Strategist Brian Gardner joins Yahoo Finance Live to discuss the debt ceiling negotiations, the 'Trump factor', possibility for a short-term suspension, and what a worst-case scenario would look like.

Video Transcript

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SEANA SMITH: President Biden is set to meet with congressional leadership tomorrow to talk about the debt ceiling. It comes as House Speaker Kevin McCarthy says the two sides are still, quote, "far apart." Joining us now is Brian Gardner, Chief Washington Policy Strategist at Stifel. Brian, it's good to see you again.

So, certainly, the clock is ticking right now. Time is running out for both sides to reach a negotiation. What's your assessment just of where talks stand and where the biggest gaps are right now in reaching that potential agreement?

BRIAN GARDNER: I think the tone is a little bit better than we've seen the last couple of months. But it's still not great, per Speaker McCarthy's comments. So I think the two sides remain pretty far apart.

I think there are a couple of areas that there's an opening to an agreement. Rescinding COVID funding is one example. Energy permitting is another. The problem with energy permitting is, what do you mean by energy permitting? And there are competing ideas on energy permitting. And the devil's in the details.

And then you get to some of the even stickier problems, which are work requirements for very social-- social safety net programs and then the cap on spending. What's the dollar amount of the cap? How long is the term? How long do those caps stay in place? So I think there's some areas for possible agreement. But I think there's also a couple of areas where they're still pretty far apart.

DIANE KING HALL: Where they're far apart, Brian-- Diane here-- what do you see as the potential landmines ahead in terms of reaching a deal on the debt ceiling?

BRIAN GARDNER: So, let me point out two. One is going back to that spending cap issue. I think Republican-- and this point is tied to the next point-- I think Republicans want substantial cuts. They want them. And they want a cap over a-- for growth of government spending over a long period of time, 10 years. And I think the administration and many Democrats will probably go along only with a shorter time period.

Let's just for a second assume that they can get some kind of deal on spending and the other items we just talked about. The other potential pitfall is what I refer to as the "T factor," the Trump factor. Last week at on a CNN Town Hall, he mentioned that if Republicans don't get massive cuts that they should default.

Now, we don't know what those massive cuts are, what is and is not massive. But if Speaker McCarthy and the president get a deal that is not up to snuff for the former President Trump and he comes in and torpedoes the deal, it could scare away House Republicans. The whole house of cards can then come down.

So it's the details of the plan and then the politics of the plan. How does that play into the 2024 elections? And does the former president see it in his interest to sow chaos. I mean, he feeds off of disruption. And this would be very much up his alley.

SEANA SMITH: Brian, what about a short-term suspension right now, an agreement on there just in terms of a short-term deal? As it stands right now, both sides don't seem to want to go that route. But could we start to see maybe that gain some traction? And what is the timeline look like on that?

BRIAN GARDNER: Yeah, so, you know, I pointed out back in early April that a short-term suspension was a possibility. As you noted, both sides have stayed away from it and are downplaying it. I still think it's kind of a failsafe option pull in case of emergency-- pull glass in case of emergency.

It also could be used if they get really close to that X date-- whenever that is-- and they're close to an agreement and they just need to buy themselves some extra days to hash out some last minute details and actually write the legislative language. Then in that scenario, you could also get a short-term suspension. So I hear what the parties are saying, that they don't want to do a short-term suspension. But I do think at the very last minute, it becomes a viable option for them.

DIANE KING HALL: So Brian, we've been here before. We've seen this before back in 2011. And you see this kind of political posturing, political brinksmanship let's play out kind of a worst case scenario. Let's say they don't do a deal. What's the worst case scenario from your view?

BRIAN GARDNER: So the worst case scenario and they don't get a deal, there are a couple of implications. First of all, I don't think a no-deal scenario is priced in, at least to the equity markets. I think equity market investors have taken the sanguine view that all they're going to get it worked out this time and why me worry? That holds until it doesn't. So if we do, if Congress and the administration does drop the ball, it's not priced into equity markets.

Then, kind of broadly speaking, what does it mean? Well, I don't think there's a default on the table for bondholders. I think that Treasury will prioritize them. I think bond payments will go out on time. It's the downstream effect, if you want.

Social Security, that probably gets paid. The military payroll probably will get paid. But on any given day, Treasury only brings in $0.75 in revenue for every dollar that it spends.

So at some point, somebody's not getting paid on any given day. And is that a vendor? Is it a contractor? So I think upstream towards the bondholders, I don't think there's an immediate impact. I think downstream towards other payments within the federal system, that's where you start to see repercussions. And I think that just kind of ripples through the economy.

SEANA SMITH: Brian, when it comes to the equity markets, like you said, investors have largely shrugged this off so far. When do you think we're going to start seeing some jitters, maybe some volatility enter the market because of this standoff?

BRIAN GARDNER: Yeah, so I think if we get to the point where the White House turns a little pessimistic again-- because it's been pretty optimistic over the weekend-- so, at that point, I think investors may rethink their positioning. Going back to 2011, I mean, the market has kind of shrugged this off all year until after July 4. And when we came back in early July from the holiday, it's at that point that investors realize, they mean it this time. We could get to an X date with no deal. And so I think if the tone changes, I think we're so close to that X date that investors will start to pay attention and reposition themselves.

DIANE KING HALL: And Brian I remember that the 2011 and leading up to that, I remember the US credit rating, the stellar credit rating, was slashed. And it was kind of a very shocking moment. Could you see that happening again?

BRIAN GARDNER: Sure, so S&P downgraded its rating back in 2011. The other rating agencies did not follow suit. We could have the other agencies join in. S&P could double down and further downgrade. What the impact of that is we don't really know. And I think a lot of investors, a lot of observers were surprised in 2011, even after the downgrade, it didn't result in an immediate increase in interest rates.

We were in a low rate environment. And we were going into an international sovereign debt issue with Greece and Italy having their problems. So there was a flight to safety. Rates on US treasuries declined. The bond market in the United States rallied. It's a different set of circumstances this time. So maybe rates do go up this time if there is a downgrade. I don't think anybody really knows at this point, but it certainly would be a possibility.