Washington, United States:
President Joe Biden and Republicans in Congress have resumed crunch talks aimed at stemming a damaging US debt default, which Treasury officials recently warned could come as early as June 1.
Biden has said default would have “catastrophic” consequences, and is urging Republicans to agree to a “clean” increase in the US borrowing limit – known as the debt ceiling – before the deadline expires. Earlier
Republicans insisted they wanted a deal from Democrats to spend less in the future for their support for expanding the nation’s borrowing authority.
Here’s what could happen to the United States, and around the world, if the US fails to raise the debt ceiling:
What will this mean for the financial markets?
If the Treasury is unable to meet all of its financial obligations, analysts predict a sharp, temporary blow to US stock markets.
Moody’s Analytics economist Bernard Yaros told AFP that a fall in US stocks would be accompanied by a rise in interest rates, especially Treasury yields and mortgage rates.
“This will lead to higher borrowing costs for corporations, for consumers,” he said.
Yaros said households or businesses that fail to receive outstanding federal payments will pull back on near-term spending because of their reduced income, while consumer confidence could deteriorate, hurting the economy.
But any shock is expected to be short-lived, with politicians likely to respond forcefully to any meaningful market reaction.
“I also expect the market to bounce back once the deal is done,” Nathan Sheets, chief economist at Citigroup Global, told AFP.
“I do not think this episode is likely to last sufficiently long that we should count on lower GDP forecasts,” he said.
What would this mean for the government?
Even if the United States misses the so-called X-date – when the government runs out of money to meet all its financial obligations – it will still have options.
For example, it may prioritize loan repayment and delay other payments — such as those to federal agencies, Social Security beneficiaries or Medicare providers.
That’s the most likely scenario, according to Wendy Adelberg, senior fellow for economic studies at the Brookings Institution.
During a similar debt ceiling impasse in 2011, Treasury officials prepared contingency plans to prevent default on Treasury securities, and to ensure that the Treasury would continue to pay interest on those securities as they become due.
Adelberg said a government shutdown is unlikely, although federal workers’ paychecks could be delayed.
What would this mean for the global economy?
Even if the US misses the X-date but continues to repay investors, political failure to reach an agreement is likely to have consequences through global markets.
The government’s inability to pay all its bills “would raise serious doubts about the country’s creditworthiness, undermine lenders’ confidence, call into question the dollar’s place as a reserve currency, and increase federal borrowing costs.” ,” wrote Paul Van Day from the nonpartisan Center in a recent blog post on water budgets and policy priorities.
“Under current circumstances, even a serious threat of a US default could be enough to shake markets and further damage the global economy,” he added.
In the unlikely event of default, the consequences would be substantial, according to Eric Dorr, director of economic studies at the IESEG business school in France.
“The interest rates charged by investors on bonds issued by the United States will rise sharply,” he said, as will private debt, which uses US government debt as its benchmark.
“This increase in the cost of credit will lead to a decline in business and domestic investment as well as consumption, and thus a sharp recession in the United States,” Dore continued, adding that it could also lead to recession in Europe and elsewhere. Can be made.
“A default would destabilize the global financial system, which depends on the dollar’s stability as the world’s safe-haven asset and primary reserve currency,” wrote Jean Ross of the nonpartisan Center for American Progress in a recent article.
“The loss of confidence in the dollar could have far-reaching economic and foreign policy implications, as other countries, especially China, would use the default to force their currency to serve as the foundation of global trade,” she said.
Can US debt be downgraded?
As the X-date draws closer, investors are nervously watching ratings agencies for signs of a possible US debt downgrade.
This last happened in 2011, when a similar debt ceiling standoff caused ratings agency S&P to downgrade its US credit rating from AAA to AA+, prompting bipartisan outrage.
According to Citi’s Nathan Sheets, if the United States exceeds the debt ceiling but continues to pay its bills, the ratings agencies will still look into it, which may prematurely call for a negotiated agreement. underlines.
“The debate about whether or not you make on-time payments is generally not a feature you would associate with a top credit” rating, he said.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)