Davos elites see a major risk ahead for markets with looming U.S. debt standoff

DAVOS, Switzerland – The concern and tech CEOs gathering astatine the World Economic Forum this week expressed measured optimism astir the system successful 2023 — but astatine slightest 1 large hazard looms for markets, they said.

The resilient U.S. economy, a mild European wintertime and China's reopening person fixed investors and forecasters anticipation that a terrible recession tin beryllium avoided, Citigroup CEO Jane Fraser told CNBC's Sara Eisen connected Tuesday.

"All successful all, the twelvemonth has started disconnected amended than everyone expected," Fraser said. "Everyone's converging present successful the states much astir a mild, manageable recessionary scenario, driven by the spot that we've got successful the labour markets."

The U.S. system has slowed since the Federal Reserve began raising involvement rates past year, sowing fears that a recession was unavoidable.

In the aboriginal weeks of 2023, investors person begun to anticipation that moderating ostentation and beardown employment figures could effect successful a alleged brushed landing. But budding optimism astatine the yearly gathering of billionaires, heads of authorities and concern leaders successful the Swiss Alps collided with a caller threat, connected apical of existing concerns including the Ukraine war and planetary clime change.

The world's largest system risks defaulting connected its indebtedness for the first time successful modern past this summertime arsenic politicians wrangle implicit raising the country's indebtedness limit, presently capped astatine $31.4 trillion. The U.S. is expected to scope its debt limit Thursday, Treasury Secretary Janet Yellen said past week. After that, the Treasury volition find ways to money their indebtedness obligations until astatine slightest aboriginal June, Yellen said.

That sets up a standoff successful Congress successful the weeks ahead. Republicans and Democrats volition prosecute successful brinkmanship implicit governmental goals. The past clip a imaginable default hazard surfaced was successful 2011, erstwhile lawmakers averted catastrophe aft markets convulsed and the U.S. had its recognition standing downgraded.

"I don't deliberation anybody knows what would hap if they truly went further than what happened successful 2011," the CEO of a Wall Street slope said connected the sidelines of the conference. "That's wherefore it's scary."

The CEO, who declined to beryllium identified speaking candidly, said helium had conscionable met a radical of U.S. lawmakers disquieted astir the coming impasse.

"It would impact markets and it would beryllium a resistance connected economical enactment due to the fact that of the uncertainty," helium said. "It would beryllium truly atrocious for us."

But coming to a woody to summation the U.S. indebtedness bounds won't beryllium casual successful a governmental situation that's grown adjacent much polarized successful the past decade.

Addressing the indebtedness ceiling "is going to beryllium hard," said Salesforce CEO Marc Benioff connected Wednesday. House Speaker Kevin McCarthy, R-Calif., has "got to grip it, but he's got a batch of issues," helium said.

The recently elected McCarthy is successful a bind. While blimpish members of his caucus importune they bash not privation the state to default connected its debt, McCarthy is nether pressure to request heavy spending cuts. McCarthy has suggested that helium won't enactment raising the indebtedness ceiling without a compromise connected spending.

The concern is simply a "mess" with astatine slightest 1 imaginable solution: Congress could walk a "clean indebtedness limit," according to Peter Orszag, the CEO of apical fiscal advisory steadfast Lazard. That refers to a borrowing summation without spending cuts.

McCarthy, however, would apt not past arsenic talker if helium agreed to that, Orszag said.

Another apical Wall Street CEO said helium planned to propulsion lawmakers astatine Davos to absorption much connected spending cuts alternatively than the indebtedness ceiling.

The worries opposition with aboriginal signs this period that formerly frozen markets person begun to awaken. For instance, indebtedness issuance has been "incredibly strong" successful January truthful far, according to Fraser.

It's excessively aboriginal to accidental whether those signs are a harbinger of amended times for concern banks and the wider economy, she said.

"We're not retired of the woods yet," Fraser said.