Tuesday May 23, 2023
President Joe Biden and Republicans in Congress have resumed talks to avert a potential default on the U.S. debt that Treasury officials have warned could occur as early as June 1. Biden has emphasized the catastrophic consequences of default and is urging Republicans to agree to a "clean" increase in the debt ceiling before the deadline. But Republicans are insisting on Democratic commitments to cut future spending in exchange for expanding the nation's borrowing authority.
Impact on financial markets
Failure to raise the debt ceiling in the United States could have significant ramifications both domestically and globally. In the financial markets, analysts are predicting a sharp but temporary shock that will lead to a drop in US stocks and a rise in interest rates, especially government bond yields and mortgage rates. This would result in higher borrowing costs for consumers and corporations, impacting overall spending and consumer confidence.
However, the expected shocks are expected to be short-lived as policy makers are likely to react strongly to any significant market reactions. Citigroup Global Chief Economist Nathan Sheets expressed confidence that markets will rebound after a deal is reached, suggesting limited long-term impacts on GDP forecasts.
What would this mean for the US government?
In terms of government operations, even if the US misses the X-date (when the government runs out of funds), it still has the ability to prioritize debt repayment and delay further payments to federal agencies, Social Security recipients or Medicare providers. This approach, which was used in a similar debt ceiling settlement in 2011, aims to prevent defaults on Treasury securities and preserve interest payments.
What would this mean for the global economy?
While a government shutdown is unlikely, failure to reach an agreement would likely have global consequences. The government's inability to pay all its bills could raise doubts about the country's creditworthiness, threaten confidence among creditors, challenge the dollar's status as a reserve currency and raise federal borrowing costs. A US default, though unlikely, would lead to a substantial increase in interest rates and private debt, which experts say would cause a sharp recession not only in the United States but also in Europe and elsewhere.
Could there be a reduction in the US debt?
In addition, as the date X approaches, the possibility of a downgrade of the rating of the US debt by the rating agencies is looming. Even if the US continues to pay its bills, credit rating agencies may still take note and emphasize the urgency of a negotiated deal to avoid a possible downgrade.
Overall, the consequences of not raising the debt ceiling could have far-reaching economic and global consequences that could affect financial markets, the stability of the dollar, and creditor and investor confidence in the U.S. economy.
