Will the US on the Edge of Debt Fall?

President Joe Biden and House Speaker Kevin McCarthy had a “productive” meeting, but they failed to reach an agreement.

June 1, the earliest date the US could default is just over a week away. President Joe Biden and House Speaker Kevin McCarthy had a “productive” and “professional” meeting on how to raise the debt ceiling, but they failed to reach an agreement.

The question, however, is what happens if the United States defaults?

McCarthy and the Republicans insisted on spending cuts, instead of raising the debt ceiling.

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Meanwhile, ‘extraordinary measures’ have been taken by the US Treasury Department to maintain cash flow until the ‘deadline’, but with no agreement in Congress to raise the limit, Treasury Secretary Janet Yellen said. warned that the United States may not meet its financial obligations by June 1.

What is the debt limit?

The cap that the US Congress sets on the amount of money the federal government is allowed to borrow is known as the debt ceiling.

The limit was introduced during World War I. Prior to this, approvals were given by the US Congress for every borrowing decision. It was simply because of the complexity of financing during the war that a borrowing limit was introduced, known as the debt ceiling.

It has been relieved or suspended several times. A crisis similar to the one the United States is currently facing occurred in 2011 and 2013.

Congress votes to raise the debt ceiling allowing the Treasury Department to continue to borrow money to pay the nation’s bills.

What’s the roadblock now?

The United States is about to reach its debt ceiling, set at $31.4 trillion. Republicans wanted to bring spending back to 2022 levels and cap future spending for the next decade. However, Democrats are unwilling to go that far to cut federal spending.

The White House, meanwhile, has proposed keeping spending at its current 2023 level. Some of the policy priorities are also under consideration, including ways to accelerate construction and development of energy projects that Republicans want. and some Democrats.

For the uninitiated, no party holds complete control of Congress. Republicans control the House 222-213, while Biden’s Democrats hold the Senate 51-49, making it difficult to strike a deal.

What if the United States defaults?

The United States is at risk of defaulting on its debt if the government does not raise or suspend the debt ceiling by June 1. This would make it difficult for the country to pay all its bills, including payments to civil servants, interest on the national debt and benefits to citizens.

Moreover, it would be the first time in history that the United States would default on its federal debt and this could have serious repercussions on the global economy.

Yellen and economic experts say it could be “catastrophic”.

The financial market could collapse

Investors around the world are keeping an eye on US government bonds because it is one of the safest investments. They would be in a panic, bringing chaos to the financial market if the United States defaulted.

Selling on the stock market and rising interest rates are also possibilities in the event of default.

Higher interest rates would slow economic growth and make borrowing more expensive for individuals and businesses.

Credit rating deterioration

Currently, the United States has a top credit rating, making it a reliable borrower, but if the United States defaults, rating agencies could lower that rating.

A lower credit rating would make borrowing more expensive and could also depreciate the value of the US dollar in foreign exchange markets.

Impact on the global economy

Considered one of the largest in the world, the US economy, if the country defaults, could have serious global consequences. There is a huge possibility that other countries will experience financial market turmoil, economic downturns and increased borrowing costs.

With contributions from agencies

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