Avoiding default is hard. Avoiding a downgrade is harder.

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May 15, 2023 View in browser   By Sam Sutton Presented by U.S. Bank  Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Though still unlikely, the odds of a U.S. default are higher than anyone would prefer. But with Republican lawmakers and President Joe Biden deadlocked on the debt limit, a costly downgrade to the federal government’s credit rating is looking increasingly likely. “The probability of a downgrade? I'd say it's over 50 percent,” said Richard Bernstein, the former longtime chief investment strategist at Merrill Lynch who now leads an eponymous investment firm. Credit-rating services do not need the U.S. to miss a bond payment to justify such an action. S&P’s historic decision to knock federal bonds from top-tier status in 2011 came after the Obama White House and Republican congressional leaders hatched a deal to link spending cuts to the debt limit. As many have observed, the political dynamics that are feeding the latest donnybrook — a divided Congress, House Speaker Kevin McCarthy’s tenuous hold over a fractured GOP caucus, Senate Minority Leader Mitch McConnell ’s unwillingness to offer an escape valve — pose a real threat to markets and the economy. And with protracted battles over the full faith and credit of the U.S. now a regular spectacle, Fitch’s Global Head of Sovereign Ratings James McCormack said in March that policymakers could “chip away” at the investment world’s long-held view that Treasuries are risk-free assets. That’s why a downgrade is “very disconcerting,” Bernstein said. “As anybody in finance knows: Lower quality credits have a risk premium: You have to pay higher interest costs.” If it gets more expensive for the federal government to borrow, it gets more expensive for everyone to borrow. Treasuries are used to price everything from consumer borrowing products like credit cards and residential mortgages to municipal debt. That’s what happened after S&P’s 2011 decision, but most people didn’t care because interest rates were so low, Bernstein added. Obviously, that’s no longer the case. Key Biden administration officials have started to talk up how the fight could harm the U.S.’ credit rating even if the White House and congressional leaders come to an agreement. Heather Boushey, who sits on the Council of Economic Advisers, briefed House Democrats about that possibility last week, and Treasury Secretary Janet Yellen issued a similar warning while in Japan. “Just the serious threat of default can lead to a downgrade of our credit rating and a weakening of consumer confidence,” Yellen said. “We could see a rise in interest rates drive up payments on mortgages, auto loans, and credit cards.” IT’S MONDAY — We hope you all had a wonderful Mother’s Day, especially if your name happens to be Sheila Borland-Sutton or LaWanna Warmbrodt. Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com. A message from U.S. Bank: At U.S. Bank, we think of ourselves as a neighborhood bank in thousands of neighborhoods across America even though we’re the fifth largest bank in the nation. From supporting veterans to helping more Americans finance their dreams, U.S. Bank is truly small enough to care, and big enough to make a difference. Learn More.   DRIVING THE WEEK MONDAY … Chicago Fed President Austan Goolsbee speaks at 8:30 a.m. … Fed Gov. Lisa Cook speaks at the U.C. Berkeley Spring 2023 Economics Commencement at 5 p.m. … TUESDAY … Former Silicon Valley Bank CEO Greg Becker, Former Signature Bank Chair Scott Shay and former Signature Bank President Eric Howell testify at Senate Banking at 10 a.m. … Fed Vice Chair Michael Barr, FDIC Chair Martin Gruenberg, NCUA Chair Todd Harper, Acting Comptroller of the Currency Michael Hsu testify at House Financial Services at 10 a.m. … Richmond Fed President Barkin speaks at 10:30 a.m. … New York Fed President John Williams speaks at 12:15 p.m. … Atlanta Fed President Bostic and Goolsbee appear on panel at 7 p.m. WEDNESDAY … Becker, Shay, New York Department of Financial Services Superintendent Adrienne Harris and California Department of Financial Protection and Innovation Commissioner Clothilde “Cloey” Hewlett testify at House Financial Services at 10 a.m. … Sen. Elizabeth Warren (D-Mass.) chairs a hearing on Fed oversight at 2:30 p.m. … THURSDAY … House Financial Services holds a hearing on stablecoin legislation at 9 a.m. … Senate Banking holds an oversight hearing with Barr, Gruenberg, Harper, Hsu, Harris and Hewlet at 9:30 a.m. … FRIDAY … Williams speaks at 8:45 a.m. … Fed Gov. Michelle Bowman speaks at the Texas Bankers Association Annual Convention at 9 a.m. … Fed Chair Jerome Powell and former Fed Chairman Ben Bernanke will speak at the Thomas Laubach Research Conference at 11 a.m. Vacation canceled? — Our Caitlin Emma and Jennifer Scholtes: “If the U.S. government doesn’t run out of borrowing power by mid-June, the nation probably won’t risk breaching the debt limit until ‘at least the end of July,’ Congress’ nonpartisan budget office said Friday. That longer-range scenario could wreck Congress’ annual monthlong break in August, keeping lawmakers in Washington to settle on a plan for raising the debt limit and preventing the nation from defaulting on its $31.4 trillion in debt.” — The shot clock is winding down to the X-date, which could come as soon as June 1. U.S. Chamber of Commerce Executive Vice President and Chief Policy Officer Neil Bradley writes that “an agreement in principle likely needs to be reached between the administration and Congressional leaders by the end of [this] week in order to ensure [it’s] enacted by June 1.” How the Supreme Court might view the debt limit fight — Our Betsy Woodruff Swan: “The court’s current approach to most cases is overwhelmingly pro-market and business-friendly. The justices would be wary of stoking economic calamity.At the same time, the conservative majority has been highly skeptical of Biden’s attempts to harness executive power and bypass Congress. If he invoked the 14th Amendment to avoid a default — an option the White House is weighing — it would be just the sort of unprecedented power grab that the conservative justices have condemned in other areas of Biden’s economic platform.” DeSantis’s finreg play — Florida Gov. Ron DeSantis is spotlighting financial services policies designed to block “government control over people’s finances” in the run-up to a likely 2024 presidential campaign. The Republican on Friday signed legislation banning merchant codes for firearms stores — creating a major hurdle for credit card companies and banks amid a messy rollout for the new code. GOP leaders blistered the firearms store code after it was adopted by the Geneva, Switzerland-based International Organization for Standardization following a years-long lobbying effort from Democratic policymakers and gun control groups seeking to track sales. DeSantis also signed a bill that bars the use of a central bank digital currency that’s issued directly to consumers by the Fed. In March, Fed Chair Jerome Powell said the central bank would need congressional authorization to issue a CBDC for consumers. A win for Menendez — Our Victoria Guida: “President Joe Biden said Friday he will promote Federal Reserve board member Philip Jefferson to the central bank’s No. 2 position and nominate World Bank official Adriana Kugler to an open seat, as the Fed weighs its next moves in the fight against inflation … The nomination of Kugler, a Colombian-American economist, comes after Sen. Bob Menendez (D-N.J.) urged Biden to fill the vacancy left by Lael Brainard, now the president’s top economic policy adviser, with a Latino candidate.” First in MM: Brown, Senate Dems push Gensler on private funds — Sen. Sherrod Brown (D-Ohio) is urging SEC Chair Gary Gensler to finalize a new rule that would force private equity firms and hedge funds to give their investors regular updates about their fees, expenses and investment practices. The rule, which has been the subject of an intense lobbying effort on the part of the private funds industry, would “provide additional transparency and comes at a critical time given the continued growth in private funds,” Brown wrote in a letter co-signed by Democratic Sens. Jack Reed (R.I.), Tina Smith (Minn.), Sheldon Whitehouse (R.I.), Richard Durbin (Ill.), Elizabeth Warren (Mass.), Ron Wyden (Ore.) and Tammy Baldwin (Wisc.). Turkish elections — The WSJ’s Jared Malsin: “Turkey’s r uling party and its opponents both claimed a lead in one of the most critical elections in the country’s history—a vote that could bring to an end the long rule of President Recep Tayyip Erdogan and have far-reaching geopolitical consequences for the Middle East, Ukraine and the North Atlantic Treaty Organization.” Annual shareholder meeting on Tuesday — The WSJ’s Jathon Sapsford: “JPMorgan Chase has become the target of a campaign by Republican state officials seeking to expose what they see as religious discrimination in the bank’s business practices.” Battered — Bloomberg’s Alexandra Semenova, Breanna Bradham and Jess Menton: “The fear-driven selloff that’s cut the stock-market values of some banks in half may look like a perfect chance to buy the dips. If only they’d stop falling.”   A message from U.S. Bank:   Crypto Dem stablecoin bill — A scoop from our Eleanor Mueller: “Rep. Maxine Waters is circulating a draft stablecoin bill among House Financial Services Committee Democrats as Republicans move quickly to set rules for the dollar-pegged digital tokens, a person familiar with the conversations said.” Coinbase staffs up — From me: “Coinbase on Friday announced that former Sen. Patrick Toomey (R-Pa.) and former Reps. Tim Ryan (D-Ohio) and Sean Patrick Maloney (D-N.Y.) would join a new Global Advisory Council to help the company ‘navigate an increasingly complex and evolving landscape in the US and internationally.’” The crypto exchange’s appointment of Maloney was announced within hours of Biden nominating the former DCCC chief to be the next ambassador to the Organization for Economic Cooperation and Development in Paris. Coinbase spokesman Garrett Balliett said that Maloney would continue to serve on the council “for now” but declined to comment on his future plans. Even so, Maloney’s work with Coinbase could create headaches for his nomination, one Democratic Senate staffer told your host. “The timing is beyond brazen,” they said.   GET READY FOR GLOBAL TECH DAY: Join POLITICO Live as we launch our first Global Tech Day alongside London Tech Week on Thursday, June 15. Register now for continuing updates and to be a part of this momentous and program-packed day! From the blockchain, to AI, and autonomous vehicles, technology is changing how power is exercised around the world, so who will write the rules? REGISTER HERE.     Regulatory Corner Market manipulation — Our Declan Harty: “The CFTC has charged an HSBC unit for allegedly pursuing years of manipulative trading tactics in the swaps markets, in addition to record-keeping violations, the agency said Friday.” Another lawsuit — Also from Declan: “The U.S. Chamber of Commerce sued the SEC on Friday in a bid to block the Wall Street regulator's new stock buyback disclosure rule.” Fly Around Sanctions — Atlantic Council GeoEconomics Assistant Director Niels Graham writes that G7 countries are still exporting around $4.7 billion per month to Russia, which equals roughly 43 percent of what they were exporting prior to the invasion of Ukraine. With the U.S. pushing for tighter sanctions ahead next week’s meeting in Hiroshima, “it will not be easy.” — The WSJ’s Georgi Kantchev, Paul Hannon and Laurence Norman: “A group of former Soviet republics has emerged as a major transshipment hub for U.S. and European computer chips, lasers and other products with civilian and military uses headed for Russia.”   DON’T MISS POLITICO’S HEALTH CARE SUMMIT: The Covid-19 pandemic helped spur innovation in health care, from the wide adoption of telemedicine, health apps and online pharmacies to mRNA vaccines. But what will the next health care innovations look like? Join POLITICO on Wednesday June 7 for our Health Care Summit to explore how tech and innovation are transforming care and the challenges ahead for access and delivery in the United States. REGISTER NOW.     Jobs Report Tyler Jett is now special adviser to the deputy secretary at the Department of the Treasury. She most recently was an economic research analyst in the office of East Asia at Treasury. Caitlin Meloski is now senior adviser for the deputy Treasury secretary. She most recently was advisor to the director of the National Economic Council. — Daniel Lippman A message from U.S. Bank: At Minnesota-based U.S. Bank, community is everything. Alongside banking services, U.S. Bank helps its over one million small business customers access programs to help them manage unique challenges. With the aim of increasing home ownership, U.S. Bank has provided more than $951 million in affordable housing lending and helped fund nearly 30,000 affordable housing units. And in honor of those who have served, U.S. Bank regularly donates mortgage-free homes, vehicles, and home repairs to military veterans. In 2021, the bank launched Operation Always Remember, giving veterans gift cards for gas, clothing, and restaurants. U.S. Bank. Small enough to care, and big enough to make a difference. Learn More.     Follow us on Twitter Mark McQuillian @mcqdc Ben White @morningmoneyben Victoria Guida @vtg2 Katy O'Donnell @katyodonnell_ Zachary Warmbrodt @Zachary Sam Sutton @samjsutton   Follow us

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