The catastrophic forecast if the US does not reach an agreement with its debt

The catastrophic forecast if the US does not reach an agreement with its debt

After the negotiations of Joe Biden and opposition leader Keving McCarthy seeking a deal on the debt ceiling, economists begin to weave their predictions of what could happen not only with the US economy but also globally.

Treasury Secretary Janet Yellen made clear what was at stake when she insisted hours earlier that it is “very likely” that the US government will run out of money after June 1. Upon receiving the leader of the House of Representatives at the White House, Biden said he was “optimistic” about closing the meeting with a “breakthrough.”

“We do not have an agreement, but a productive discussion in the areas where we have differences of opinion,” McCarthy said after the meeting. “The tone of the meeting tonight has been better than all the times before,” she added, but noted: “We still have philosophical differences.”

To eliminate the risk of a default, Congress must approve raising the ceiling on public debt. The Senate is controlled by the Democrats and the Republicans control the House of Representatives.



Republicans are demanding a sharp cut in public spending as a condition of increasing borrowing but Biden, who is campaigning for re-election in 2024 on promises of social justice, opposes it.

The so-called “debt ceiling” of more than $31 trillion – a world record – was reached several months ago, but the federal government has so far managed the situation through accounting manoeuvres.

The consequences for the world economy would be catastrophic.

“America has never defaulted on its debts. And that will never be the case,” Biden said.

A decision made at the last minute could also have consequences. In 2011, there was only the threat of default and this caused, for the first time, the United States to lose its precious triple A credit rating; the best rating agency.

Like almost all major economies, the United States lives on credit. However, in the United States it is the prerogative of Congress to vote to increase the public debt ceiling that the world’s leading economy is authorized to accumulate.

And what was initially a formality has now become a political battle.

What do economists think?

“Any American who directly or indirectly depends on a government payment will stop getting paid,” Gregory Daco, chief economist at EY Parthenon, told AFP.

This implies the salaries and pensions of civil servants and soldiers, social benefits related to children, health care, low income or the elderly.

The Treasury risks “running out of cash to pay hundreds of billions of dollars” of bills, says Nancy Vanden Houten, an economist at Oxford Economics. “Companies that work for the government will not be paid either,” Daco added.

On the other hand, “if the stock markets fall, (…) people’s savings and also their retirement savings would be affected,” Nathan Sheets, chief economist at Citigroup bank, told AFP.

Dollar rose 18 cents to $37.43 in an atypical wheel for a US holiday

Impact on world markets

“From a financial markets standpoint, there would be enormous stress,” Daco said. In 2011, when the United States came close to defaulting on its debts, the New York Stock Exchange crashed and the S&P 500 fell “about 13-14%,” he recalls.

What would make a big difference is if the United States is unable to pay Treasury bondholders; safe haven from global finance.

If US stocks collapse, “the situation would be catastrophic for all organizations that own a lot of US government bonds, such as banks, pension funds, insurance companies or mutual funds,” says Eric Dor, director of the IESEG business school.

That, in addition, would imply the risk of bankruptcies and “knock-on effects with a new global financial crisis.” The dollar, meanwhile, would depreciate “very strongly,” he estimated.

The global financial system “depends on the stability of the dollar,” the Center for American Progress said May 11.

Source: Ambito

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