The U.S. is on the precipice of bankruptcy and could drag the world into another financial crisis.
They call it the ‘X date’. It is the day when the US Government will no longer have the liquidity to meet its payments and it could come as early as next Thursday, June 1. The U.S. is looming closer than ever to the abyss of financial bankruptcy. Treasury Secretary Janet L. Yellen has already said that the country is half a foot in bankruptcy and that she considers it “very likely” that it will plunge into that precipice if a deal is not reached ‘in extremis’ in Congress that would raise the debt ceiling.
The experts consulted by 20minutos predict that there will be last-minute agreement and the U.S. will save the situation, at least temporarily, but they believe that flirting with the financial abyss is not without risk for global financial markets. And, furthermore, they believe that, if the US finally defaults on a prolonged basis, a scenario never explored before, it would be economically devastating and could plunge the world into another financial crisis.
What is the debt ceiling?
The DEBT CEILING is a ceiling on the amount of money the U.S. government is allowed to borrow through bills and bonds to meet its financial obligations. Since 1917, in order to change that maximum borrowing figure the Treasury Department, now under Janet L. Yellen, has had to ask Congress for a change in legislation. The debt ceiling has been raised 78 times since 1962, most recently in 2021. Congress voted to raise it by $2.5 trillion to the current $31.4 trillion that President Joe Biden signed on December 16, 2021.
What is the dreaded ‘X date’?
On January 19 the US reached the technical limit of the debt ceiling, $31.4 trillion, but the Treasury announced “extraordinary measures” (fiscal accounting tools) to curb investments and pay down debts. However, there is no more room for more creative accounting and the Treasury head has estimated “very likely” that on June 1 the country will stop paying bills. That is the ‘X date’, When the government will run out of cash if it does not get permission to issue new debt..
What is the way to avoid it?
U.S. President, Joe Bidenand the Speaker of the House, Republican Rep. Kevin McCarthyhave been negotiating for days to raise the debt ceiling to prevent catastrophe. They have held several meetings, but still differences prevail over agreements.
Santiago Carbó, director of Financial Studies at Funcas, believes that for weeks now “the entire American constitutional system” is being put to the test and regrets that “lately in politics everyone values positively to stress the situation and to put themselves on the precipice because it brings votes.
Republican McCarthy intends to impose public spending cuts “that will condition the rest of Biden’s policy until the elections,” Carbó points out. According to U.S. media, Biden does not accept reductions in programs such as housing, toxic waste cleanup, air traffic control or cancer research. The Democratic proposal includes new taxes on the rich and large corporations, but the Republicans do not accept them. Meanwhile, the clock is ticking on the default. There is almost no time left. McCarthy, in fact, has promised 72 hours for his lawmakers to review any agreement, reports the Associated Press.
Will there be time to avoid bankruptcy?
There are those who believe that America has never been so close to bankruptcy.. “By early June, the Treasury will be skating on very thin ice that will get thinner with each passing day. The problem with skating on thin ice is that sometimes you fall off,” reads a study published by financial analysts in the NYT.
However, rating agencies consulted by media outlets such as POLITICO are counting on an agreement before June 1. Moody’s said that as long as the US pays interest and principal on the bonds, it will not be in default. The director of financial studies at Funcas, on the other hand, believes that an agreement will be reached, even though they are now devoting themselves to “putting a little more pressure”. “Congress has to do it sometime very soon,” Goldman Sachs chief research economist Alec Phillips also told Bloomberg. “Waiting until the last minute isn’t necessarily the right move,” he warned.
In addition, and as Carbo points out, there is a mechanism of last resort. It would require Biden to invoke the 14th amendment which prevents federal debt defaults, although it would pit the president against Congress.
The 2011 precedent: near default.
The most acrimonious debt ceiling showdown in recent times in the U.S. occurred in 2011, with Barack Obama in the White House. Analysis following that near-default showed that the stock market crash decreased household wealth by 2.4 billion and cost taxpayers 1.3 billion in higher interest payments. However, analysts believe that the situation is worse now: “In the current situation, where there’s a lot of fragility in the banking system, you’re taking more risk. You’re piling fragility on top of fragility,” they have warned.
Repercussions of bankruptcy within the U.S.
Economists believe that the Treasury will try to prioritize some payments over others because. failing to meet them would shake the markets.
“If Congress does not raise the debt limit, it would cause severe hardship to American families, would damage our position of global leadership and raise doubts about our ability to defend our national security interests,” Secretary of State Janet L. Yellen has said.
Analysts at Moody’s have concluded that even if the debt limit were breached for just one week, the U.S. economy would weaken so much, so fast, that it would eliminate 1.5 million jobs. For its part, the White House Council of Economic Advisors believes that if it takes time to reach an agreement, the economy could contract by as much as 6.1%.. Therefore, the effects will depend on whether default comes and how long the country goes without suspending the current debt ceiling.
What would be the consequences globally?
A first-time default on the federal debt would quickly reverberate around the world. The U.S. is a top-tier international trading partner, which would affect multiple economies. “No corner of the global economy will be spared,” the chief economist at Moody’s Analytics has acknowledged.
For the Professor of Economics at the University of Alicante, Paloma Taltavull, it could affect. the country’s credit rating and investor confidence. in the debts of other countries. According to this expert, Latin American countries “whose debt is linked to that of the United States” would be the first to be affected.
Although the financial markets are attentive, but not in panic, the first thing that would happen is that investors would lose confidence in the public debt of all countries, and this would become more expensive, because if the US debt falls into disgrace it could happen in any other country. In turn, the value of the dollar would also fall, and they recall that this threat looms over a world economy afflicted by inflation and interest rate hikes, With the war in the Ukraine and the aftermath of the pandemic.
How much is the cost of flirting with bankruptcy?
Experts insist that, sooner or later, the U.S. will reach a deal to avoid financial bankruptcy. But flirting with bankruptcy also has consequences, they predict. According to the NYT, tightening the noose is increasing the cost of borrowing, hurting Americans’ wallets and destabilizing financial markets. That said, if the political standoff is not resolved this time, markets “that are now just nervous could panic” and that would be “economically devastating and could plunge the world into a financial crisis,” they warned.. “It’s a very dangerous game,” Carbó describes.