Debt dispute in the USA ends: Biden: “We prevented economic collapse”

Debt dispute in the USA ends: Biden: “We prevented economic collapse”

A sigh of relief in the USA and on the markets: After long negotiations, the bitter debt dispute between Democrats and Republicans ends. But hardly anyone is really enthusiastic about the compromise.

After the cross-party agreement on a solution to the US debt dispute, President Joe Biden called for cooperation between Democrats and Republicans. With a highly symbolic appearance, Biden celebrated the averting of a government default on Friday evening (local time) and warned that in dramatic situations like this there is no way around non-partisan cooperation. “It couldn’t have been more at stake,” the Democrat said in an address to the nation from the Oval Office at the White House. “We prevented an economic crisis and an economic collapse.”

It was Biden’s first official address to the nation from the Oval Office since taking office almost two and a half years ago. Such speeches from the President’s office at government headquarters, which are broadcast live on US television during prime time, are a rarity and are reserved for major situations and crises.

insolvency averted

An impending insolvency of the US government has now been averted. After the House of Representatives, the Senate in Washington also approved a bill late Thursday evening (local time) that would suspend the federal debt ceiling in the United States until 2025. This was last at around 31.4 trillion dollars (about 29.1 trillion euros). Without the move, the US government would have run out of money in a matter of days. It was considered a formality that President Joe Biden put the law into effect with his signature.

With the final vote in Congress, a long political nail-biter ended, which had triggered great concerns about an economic crisis in the USA and beyond. Until the very end, President Biden’s Democrats had fought bitterly with the Republicans to reach a compromise. A default by the world’s largest economy could have triggered a global financial crisis and economic downturn. The political impasse in Washington therefore also caused unrest on the stock exchanges. The agreement was now also noticeable on the German stock market and put investors in a buying mood on Friday.

US Treasury Secretary Janet Yellen expressed her relief at the agreement. “This law protects the full confidence and credit of the United States and preserves our financial leadership, which is critical to our economic growth and stability,” it said in a statement. A default could have cost the country millions of jobs, among other things, she wrote. Yellen previously warned that the government could default on Monday.

The deal

Biden and the Republican chairman of the House of Representatives, Kevin McCarthy, had struggled in tough negotiations over the past few weeks to reach a cross-party compromise and only presented a deal last weekend. This provides that the size of the federal budget, which the Democrats wanted to increase under Biden, is effectively frozen. The budgets of many federal agencies and ministries are being adjusted for this. The Republicans were also able to enforce that recipients of certain social benefits must prove a job. The Democrats actually wanted to increase state revenues by taxing the rich more heavily. On the other hand, the Republicans braced themselves.

Many Democrats and Republicans alike are dissatisfied with the deal. Left-wing democrats complain about cuts in the social sector. For right-wing Republicans, the cuts don’t go far enough. And many moderate politicians from the middle of both parties are not at all enthusiastic. In view of the threatening dramatic consequences of a default, however, sufficient members of Congress from both camps ultimately voted in favor of the deal and thus secured the necessary majority in Parliament.

The independent Budget Office of the US Congress estimates that the agreement will reduce the budget deficit by about $1.5 trillion over the next ten years. According to the Washington Post, this actually contributes little to balancing the budget. In an opinion piece, the newspaper wrote that raising or suspending the debt ceiling should be a routine matter for Congress. “The US and global economy should have been spared tensions over a potentially catastrophic default.”

The vote

A bipartisan majority in the Senate voted to pass the bill, which would suspend the debt ceiling until 2025 while curbing government spending over the next two years. 63 out of 100 senators helped the draft to the necessary majority, including 46 Democrats and 17 Republicans.

Senate Majority Leader Chuck Schumer said he was relieved. “We avoided a catastrophic default,” he said. The Democrats in particular would have carried the agreement across the finish line, because in both chambers of Congress more Democrats than Republicans would have voted for the deal.

In a rare joint statement, Schumer and Republican Senate Minority Leader Mitch McConnell pledged that the cuts will not diminish U.S. military strength: “The agreement does not limit the Senate’s ability to allocate additional contingency funds to ensure our military… Capabilities sufficient to deter China, Russia and our other adversaries.”

Biden emphasized that senators from both parties prevented a default with their votes. “Together they have proven once again that America is a nation that pays its bills and honors its obligations – and always will.”

The tugging before

The background to the debt drama: In the USA, parliament sets a debt ceiling at irregular intervals and thus determines how much money the state can borrow. This time the procedure degenerated into bitter party-political wrangling and ideological trench warfare between Democrats and Republicans.

The Republicans, who have had a majority in the House of Representatives since January, refused to raise the debt ceiling for many weeks and demanded significant cuts in government spending. They argued that government spending was out of control and at irresponsible levels. The Democrats, on the other hand, accused the Republicans of risking economic disaster just to make themselves known politically.


The rating agency Fitch continues to threaten the USA with downgrading of the top rating despite agreement in the debt dispute. The rating agency said today that “repeated political standoffs around the debt ceiling” and their “last-minute suspensions” are weakening confidence.

The credit watchdogs kept the top rating “AAA” for the US, but left the outlook for creditworthiness at “negative”. The intention is to lift this, probably in the third quarter. Last week, Fitch threatened the downgrade for the first time in the course of the debt dispute.

Source: Stern

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