On May 12, the Congressional Budget Office stated that the US government will likely run out of funds during the first two weeks of June. This follows a letter from Treasury Secretary Janet Yellen to congressional leaders that the federal government could run out of funds to pay existing commitments ''potentially as early as June 1'' because of lower-than-expected tax receipts.

On May 16, the four leaders of Congress met with US President Joe Biden to talk about future fiscal policy. S&P Global Market Intelligence maintains the view that a last-minute negotiated compromise is likely, but that the risk of a technical default has increased.

Our baseline forecast remains that the White House and congressional leadership will complete a last-minute negotiated compromise. This scenario would mirror the 2011 debt ceiling crisis, where Republicans pushed then-president Barack Obama to accept budget cuts to extend the debt ceiling. It should be noted that a compromise would not necessarily need to come from Biden or Republican Speaker of the House Kevin McCarthy; it could arise from moderates in either the Senate or House.

Congressional Republicans have demanded that the White House negotiate with them on lowering federal spending to increase the current $31.4-trillion limit, while the White House has insisted that it will not bargain on raising the ceiling. In the event both sides fail to reach a settlement, two other options for Democrats remain:

• President Joe Biden's administration could simply ignore the debt limit statue, contending that the US must pay its debts constitutionally via the 14th Amendment, which Republicans would almost certainly challenge legally to the US Supreme Court. The White House has increasingly suggested this as a viable option.

• Democrats could attempt to pass a bill with a clean debt ceiling extension via a discharge petition in the House over the objections of the Republican leadership, although it would require five Republicans to vote against their party's position, which none have done currently.

If none of these efforts is successful and the US loses its capacity to pay its liabilities, the resulting negative consequences on bond, equity and other financial markets would be likely to press key actors to conclude talks quickly, as the public and political donors demand swift action following the economic fallout. However, prior to this negotiated settlement, without sufficient funding and the government incapable of borrowing, the US will likely prioritize sovereign debt payments due to concerns an outright default would have on future US borrowing and because the US sovereign debt payment system runs on a more streamlined platform than normal government operations, making such payments easier to disburse.

With the remaining revenue, the Biden administration would likely prioritize entitlement payments, like Social Security and veterans' programs. However, a majority of government vendor payments would cease, and most government operations would be affected severely, with most government employees furloughed without pay, resulting in significant administrative delays.

While an April 26 bill, passed by the Republican House, will not become law, some of its provisions, such as cutting the funding level for non-military discretionary spending, energy project permitting reform, retracement of unspent COVID-19 stimulus spending and work requirements for those receiving government assistance, have become the foundation of a potential compromised solution. Both sides now need to find an acceptable win-set that will allow each side to claim victory. For example, Republicans have offered 10-year spending caps, while the White House has countered with two-year caps, or just past the next federal election, when they could revise the spending provisions if they regained their congressional majorities.

Previous standoffs as a guide

Ultimately, both sides will need to meet in the middle on all the items above and more, with only weeks to finalize details and get any agreement through both the House and the Senate. Items likely excluded from any future deal comprise any substantial corporate or individual tax increase or significant cuts to Biden's advanced energy or social programs. If previous debt standoffs provide a guide, any agreement is likely to come only days or even hours before the US exhausts its spending authority, thus requiring a short extension.

As the US nears default, if negotiations appear stalled, political moderates in both parties will likely begin to advance their own compromise or advocate a short-term clean debt ceiling increase. In previous instances where equity prices fell substantially because of political posturing in Congress — the 2008 bank bailout bill and the 2011 debt ceiling crisis — political leaders have quickly sought compromise and passed needed legislation to calm financial markets. Currently, politicians across the ideological spectrum continue to espouse their party's initial negotiating positions. However, as the end date becomes clearer and the White House begins to announce publicly the final date before funding runs out, moderate House and Senate members will likely initiate conversations to either reach a compromise or a temporary extension, perhaps until late September 2023, when debt ceiling negotiations can run concurrently with fiscal year 2024 budget talks.

According to S&P Global Market Intelligence economists, even if a last-minute deal is reached, financial markets face the potential of severe downturns, as occurred in 2011.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.