Davos elites see great risk ahead for markets with a looming deadlock in US debt

DAVOS, Switzerland — Finance and technology CEOs meeting at the World Economic Forum this week expressed moderate optimism about the economy in 2023 — but at least one major risk looms for markets, they said.

The resilient US economy, a mild European winter and China’s reopening have given investors and forecasters hope that a severe recession can be avoided, Citi group That’s what CEO Jane Fraser told CNBC’s Sara Eisen on Tuesday.

“All in all, the year has started better than anyone expected,” said Fraser. “Everyone is now converging more in the states around a mild, manageable recession scenario, driven by the strength we have in the labor markets.”

The US economy has slowed since the Federal Reserve began raising rates last year, sparking fears that a recession was inevitable.

In the first weeks of 2023, investors began to hope that moderating inflation and strong employment data could lead to a so-called soft landing. But burgeoning optimism at the annual gathering of billionaires, heads of state and business leaders in the Swiss Alps encountered a new threat on top of existing concerns, including the war in Ukraine and global climate change.

The world’s largest economy is at risk of default for the first time in modern history this summer as politicians argue over raising the country’s debt limit, which is currently capped at $31.4 trillion. Treasury Secretary Janet Yellen says the US will hit its debt limit on Thursday. After that, the Treasury Department will find ways to fund its debt obligations through at least early June, Yellen said.

That will create a deadlock in Congress in the coming weeks. Republicans and Democrats will be on the verge of political goals. The last time potential default risk surfaced was in 2011, when lawmakers averted disaster after markets were in turmoil and the US credit rating was downgraded.

“I don’t think anybody knows what would happen if they really went beyond what happened in 2011,” the CEO of a Wall Street bank said on the sidelines of the conference. “That’s why it’s scary.”

The CEO, who declined to be disclosed, said candidly that he had just met with a group of US lawmakers who were concerned about the impending deadlock.

“It would affect the markets and it would be a drag on economic activity because of the uncertainty,” he said. “It would be very bad for us.”

But reaching an agreement to raise the US debt limit will not be easy in a political climate that has become even more polarized over the past decade.

Tackling the debt ceiling “is going to be difficult,” he said Sales team CEO Marc Benioff on Wednesday. House Speaker Kevin McCarthy has to “handle it, but he has a lot of problems,” he said.

The newly elected McCarthy is in trouble. While conservative members of his caucus insist they don’t want the country to default on its debts, McCarthy is under pressure to demand major cuts. McCarthy has suggested he will not support raising the debt ceiling without a compromise on spending.

The situation is a “mess” with at least one possible solution: Congress could pass a “clean debt limit,” said Peter Orszag, the CEO of leading financial consulting firm Lazard. That is an increase in lending without spending cuts.

However, McCarthy probably wouldn’t survive as a speaker if he agreed, Orszag said.

Another top Wall Street CEO said he intended to push lawmakers in Davos to focus more on spending cuts rather than the debt ceiling.

The concerns contrast sharply with the first signs this month that previously frozen markets are starting to wake up. For example, according to Fraser, debt issuance in January was “incredibly strong”.

It is too early to say whether these signs herald better times for investment banks and the economy in general, she said.

“We’re not out of the woods yet,” Fraser said.