Webdesk: Treasury officials have said that the US could default on its debt as early as June 1. President Joe Biden and Republicans in Congress have started talking again about how to avoid this. Biden has talked a lot about how bad a default would be and is trying to get Republicans to agree to a “clean” increase in the debt cap before the deadline. But Republicans won’t agree to increase the country’s borrowing power until Democrats promise to cut spending in the future.
Effect on the stock market
If the United States doesn’t raise its debt limit, it could have big effects both at home and around the world. Analysts expect a sharp but short-term shock in the financial markets, which will cause US stocks to go down and interest rates, especially Treasury yields and mortgage rates, to go up. This would make it more expensive for consumers and businesses to borrow money, which would hurt total spending and consumer confidence.
But the expected shocks likely to short-lived because politicians are likely to react strongly to any big changes in the market. Nathan Sheets, the chief global economist for Citigroup, said he confident that the markets would recover once a deal made. This suggests that long-term effects on GDP forecasts would be small.
How would it affect the government of the US?
Even if the US skips the X-date, which is when the government runs out of money, it can still choose to pay off debt first and delay payments to federal agencies, Social Security recipients, or Medicare providers. This plan, which used in 2011 during a similar standoff over the debt limit, meant to keep interest payments on Treasury securities and keep the government from defaulting on its debt.
What would that mean for the business around the world?
Even though a government shutdown is rare, not coming to an agreement would likely have effects all over the world. If the government can’t pay all of its bills, it could raise questions about the country’s creditworthiness, hurt confidence among lenders, put the dollar’s position as a reserve currency into question, and make it more expensive for the government to borrow money. Even though it is rare, a US default would lead to a big rise in interest rates and private debt. This would cause a sharp recession not only in the US but also in Europe and other places.
Could the US debt made worse?
Also, as the X-date gets closer, there is a chance that rating agencies will lower the US debt. Even if the US keeps paying its bills, the rating agencies might still take notice. This would show how quickly an agreement needs to be reached to avoid a drop in the US’s credit ranking.
Overall, if the debt ceiling isn’t raised, it could have serious effects on the economy and the rest of the world. This could affect financial markets, the stability of the dollar, and the trust of lenders and investors in the US economy.
