How Companies Should Prepare for Repeated Debt-Ceiling Standoffs

They’re not just political gimmicks.

by

and

Manuela M. Dantas

by

and

Manuela M. Dantas

August 22, 2023

Illustration by Nate Kitch

Summary.

Since a major realignment of the U.S.’s two-party political system is unlikely, we can expect partisan conflict and the subsequent debt-ceiling standoffs to continue for the foreseeable future. Corporate managers must not regard debt-ceiling crises as just political gimmicks, as they repeatedly and predictably affect firm profitability, growth prospects, and uncertainty. Managers must proactively gather information, anticipate, plan, and allocate resources in preparation of each crisis. They must be able to capitalize on opportunities that arise from each standoff and be prepared to weather each storm.

On August 1, Fitch, one of the three major credit rating agencies, downgraded the U.S. credit rating amid yet another debt-limit standoff, removing the U.S. government from the list of risk-free borrowers. In doing so, it made good on the warning it issued during the last debt-limit fight in May 2023, when it put the U.S.’s AAA rating on negative watch. Even S&P, another of the major credit rating agencies, warned at that time: “The last-minute negotiated compromise is likely, but…the risk of a technical default has increased.” Fitch clarified the reasoning for its August 1 downgrade in a statement: “[The] repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.” The ensuing rout in global financial markets once again shone a spotlight on the U.S.’s repeated debt-ceiling crises.

Vijay Govindarajan is the Coxe Distinguished Professor at Dartmouth College’s Tuck School of Business, an executive fellow at Harvard Business School, and faculty partner at the Silicon Valley incubator Mach 49. He is a New York Times and Wall Street Journal bestselling author. His latest book is Fusion Strategy: How Real-Time Data and AI Will Power the Industrial Future . His Harvard Business Review articles “Engineering Reverse Innovations” and “Stop the Innovation Wars” won McKinsey Awards for best article published in HBR. His HBR articles “How GE Is Disrupting Itself” and “The CEO’s Role in Business Model Reinvention” are HBR all-time top-50 bestsellers. Follow him on LinkedIn.
vgovindarajan
Anup Srivastava holds Canada Research Chair in Accounting, Decision Making, and Capital Markets and is a full professor at Haskayne School of Business, University of Calgary. In a series of HBR articles, he examines the management implications of digital disruption. He specializes in the valuation and financial reporting challenges of digital companies. Follow Anup on LinkedIn.
Felipe B. G. Silva is an assistant professor at the Trulaske College of Business of the University of Missouri. His research revolves around financial economics and macroeconomics and has been featured in venues such as Bloomberg and The Washington Post. His private sector experience includes the aerospace and financial services industries.
Manuela M. Dantas is an assistant professor at the David Nazarian College of Business and Economics of California State University, Northridge. Her research interests include financial accounting, ESG investing, greenwashing, behavioral finance, banking, and political science. Follow Manuela on LinkedIn.

How Companies Should Prepare for Repeated Debt-Ceiling Standoffs

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