The clock is ticking on a deal to suspend the $31.4 trillion borrowing cap - Source: Shutterstock
Biden, McCarthy must go through Congress to approve US debt ceiling deal
ALBAWABA – The United States (US) Congress is slated to discuss and approve the deal struck Saturday between President Joe Biden and House of Representatives Speaker Kevin McCarthy, which would resolve the US debt ceiling crisis and enable the government to pay its bills by June 4.
As the United States grapples with the ongoing debt ceiling crisis, economists and politicians, along with the rest of the world, hold their breath for a solution.
The clock is ticking on a deal to suspend the $31.4 trillion borrowing cap, and with it, the fate of the American and global economies hangs in the balance.
The debt ceiling sets the effective maximum limit that the federal government is permitted to borrow to meet its existing obligations. The US reached the limit back in January 2023.
In the subsequent months, the Treasury Department has been utilizing a series of extraordinary measures to stave off a default. But their options are running out.
These measures are on the brink of exhaustion.
If an agreement isn’t reached swiftly, the US will face the unprecedented prospect of defaulting on its bills due on June 1, Al Jazeera reports.
What if the US debt ceiling crisis is not resolved?
The immediate impact of a US default would be the government's inability to fulfil its financial obligations. This includes but is not limited to salaries of federal employees, military personnel, payments to contractors, and funds for various social programs.
Woes of prolonging the US debt ceiling crisis
Alarmingly, the Congressional Budget Office and the Treasury Department have projected that if the government delays payment for just one week, about 500,000 Americans would be out of work and the economy would contract by 0.6 percent, as reported by Reuters.
The fallout of a default would not be limited to the governmental sphere in the United States. Tremors of such an event would ripple across the national and global economies.
The financial markets, acutely sensitive to even the most minor fluctuations, would likely react sharply to such a development. Investors could be looking at precipitous falls in stock markets.
A payment default could potentially trigger a 45 percent plunge in the stock market, thereby decimating retirement savings and wealth accumulated over years, according to CNBC.
More so, government bonds, traditionally viewed as one of the safest investment avenues worldwide, would also take a hit.
The reliability of the US in fulfilling its debt obligations has resulted in US treasury bonds becoming an almost risk-free investment.
A default could jeopardize the historical status of US bonds, causing their value of these bonds to plummet and burn through billions of dollars of individual and government investments.
Moody’s has predicted a $12 trillion loss in household wealth in case of a default.
Moreover, an unprecedented default could dent international creditors' faith in America's ability to service its debt. Consequently, the cost of borrowing for the government could rise, creating a vicious debt cycle, which could be difficult to break.
In the aftermath of the 2011 debt ceiling crisis when the United States’ credit rating was downgraded from AAA to AA+ by Standard and Poor (S&P), borrowing costs increased for the US government by $1.3 billion, as per CNBC.
Additionally, the implications for the housing market are equally concerning.
The possible surge in interest rates could drive mortgage rates even higher. Considering the rates are already at 6.4 percent as of May 2023, a further increase could significantly impact homeowners. According to think-tank Third Way, a single default could add a staggering $130,000 to the cost of an average 30-year mortgage.
Naturally, a default could also aggravate existing inflationary pressures.
The rise in interest rates may result in reduced spending and investment. This will slow down economic growth and lead to a in unemployment.
CNBC News reports that the US economy could spiral into a "Great Recession." An estimate of 8.3 million jobs will be lost over a three-month period in the event of a default, the news outlet said.
Global Implications of the US debt ceiling crisis
Furthermore, a default could precipitate a crisis in the foreign exchange markets, as the US dollar plays a pivotal role in global trade and finance.
A substantial loss in confidence could lead to the depreciation of the dollar. This would exacerbate already strained trade relationships and possibly lead to an increase in import costs.
On the other hand, the US' standing as the world's leading economy and the reliability of its ability to meet its obligations are the bedrocks of the current international financial system. A default could disrupt the stability of this system. This may lead to a global financial crisis similar to 2008’s.
Ultimately, a US default on its debt would have profound and far-reaching effects. Not only damaging the domestic economy but also creating significant financial challenges worldwide.
The severity of these consequences highlights the importance of getting the US debt ceiling deal approved by Congress as soon as possible.
Otherwise, the US would be venturing into entirely "uncharted territories" in the event of a default, according to Federal Reserve Chair Jerome Powell, and the whole world along with it.
