US debt ceiling impasse will cause emerging markets to suffer, Moody's says

President Joe Biden and US House Speaker Kevin McCarthy remain locked in negotiations on how to raise the debt ceiling. Reuters

Stalled negotiations on raising the debt ceiling is one of numerous economic problems in the US that will cause emerging markets to suffer, a report from Moody’s has found.

House Speaker Kevin McCarthy said that late-night discussions between negotiators on Wednesday had led to some progress in breaking the deadlock with the White House.

“There’s still some outstanding issues and I’ve directed our teams to work 24/7 to try to solve this problem,” he said.

Kevin Hern, head of the largest Republican caucus in the chamber, said a deal could be reached by Friday afternoon.

The credit agency said “any consequences of the debt-ceiling impasse” would contribute to weakening credit conditions in emerging economies.

Thursday’s report from Moody’s was the latest in a trio of warning signs for the world’s biggest economy.

Revised GDP figures released by the Commerce Department showed that the US economy grew by 1.3 per cent in the last quarter, slightly higher than original 1.1-per cent estimates but still at a tepid pace.

Both Moody’s and the Federal Reserve anticipate that the US will enter a mild recession this year. The credit agency said the US central bank’s monetary policy, as well as stress in the banking system, could also harm emerging markets.

“The focus of many market participants has returned to the global economic growth outlook and the future path for US interest rate,” the Moody’s report said.

Minutes from the Fed’s May 2-3 meeting showed that policymakers remain uncertain on how to tackle interest rates in future meetings, with some participants arguing for a pause in rate increases while others felt more tightening was needed.

The central bank raised interest rates to the range of 5 and 5.25 per cent in a continued effort to drive down the nation’s inflation. The Fed’s preferred inflation metric showed prices increased by 4.2 per cent year-on-year in March, still well above their 2 per cent target.

“Risks to our baseline include whether and how quickly US inflation subsides and the Fed’s response to it,” Moody’s said.

The agency expects growth to decline “in most emerging markets this year” with commodity exporters in the Middle East among those to face the most hardship. Exporters in Africa and Latin America are also projected to suffer.

The report comes a day after Fitch, a rating agency, placed the US on negative credit watch because of the impasse in Washington.

“Tonight’s warning underscores the need for swift bipartisan action by Congress to raise or suspend the debt limit and avoid a manufactured crisis for our country,” Treasury Department spokeswoman Lily Adams tweeted.

With the threat of a default looming, Treasury Secretary Janet Yellen said the US was already feeling the effects of brinkmanship over the debt ceiling. Fed Chair Jerome Powell has also warned his department would not be able to protect the US economy in the event of a default.

Cutting back federal spending, work requirements for social programmes and permitting reform have been the key points of conflict between President Joe Biden and Mr McCarthy.

Time is running out, with only seven days to go until the date on which Ms Yellen said the US could default on its financial obligations. Even a short-term default could have disastrous effects for the US economy, she has warned.

Members of the House of Representatives began on a 10-day recess and are not scheduled to return until June 4. Mr McCarthy said House members would be given 24 hours’ notice to return to Washington if there needs to be a vote on a proposal before then.

With such a tight deadline and with many members currently out of town, Congress will have to rush the bill through both chambers before it goes to Mr Biden’s desk.