Bermuda Post

Friday, Apr 19, 2024

How US Debt Default Would Affect Global Economy, Financial Markets

How US Debt Default Would Affect Global Economy, Financial Markets

Biden has maintained that default would have "catastrophic" consequences, and is urging Republicans to agree to a "clean" increase to US borrowing limits -- known as the debt ceiling -- before the deadline is reached.
President Joe Biden and Republicans in Congress have resumed crunch talks aimed at averting a damaging US debt default, which Treasury officials recently warned could come as early as June 1.

Biden has maintained that default would have "catastrophic" consequences, and is urging Republicans to agree to a "clean" increase to US borrowing limits -- known as the debt ceiling -- before the deadline is reached.

Republicans have pushed back, insisting they want an agreement from Democrats to commit to less spending in future in order for their support to extend the nation's borrowing authority.

Here is what could happen in the United States, and around the world, if the US fails to raise the debt ceiling:

What would it mean for financial markets?

If the Treasury is unable to meet all of its financial obligations, analysts forecast that US stock markets would likely suffer a sharp, temporary shock.

Along with a decline in US stocks, interest rates would spike, especially Treasury yields and mortgage rates, Moody's Analytics economist Bernard Yaros told AFP.

"That would lead to higher borrowing costs for consumers, for corporations," he said.

Households or businesses who fail to receive federal payments owed would likely pull back on near-term spending due to their loss of income, while consumer confidence may worsen, hurting the economy, Yaros said.

But any shocks are expected to be short-lived, with politicians likely to respond forcefully to any meaningful market reaction.

"I also would expect that once the deal's done the markets bounce back," Citigroup Global Chief Economist Nathan Sheets told AFP.

"I don't think that this episode is likely to be sufficiently long-lived that we should be calculating lower GDP forecasts," he said.

What would it mean for government?

Even if the United States misses the so-called X-date -- when the government runs out of money to meet all its financial obligations -- it will still have options.

It could, for instance, choose to prioritize debt repayment and delay other payments -- such as to federal agencies, Social Security beneficiaries, or Medicare providers.

This is the most likely scenario, according to Wendy Edelberg, senior fellow in economic studies at the Brookings Institution.

During a similar debt ceiling stand-off in 2011, Treasury officials drew up contingency plans to prevent a default on Treasury securities, and to ensure the Treasury would continue to pay interest on those securities as they come due.

A government shutdown would be unlikely, although federal workers' paychecks could be delayed, Edelberg said.

What would it mean for global economy?

Even if the US misses the X-date but continues repaying investors, the consequences of the political failure to reach agreement would likely ripple through global markets.

The government's inability to pay all its bills "would raise serious doubts about the nation's creditworthiness, sap the confidence of lenders, call into question the dollar's place as a reserve currency, and increase federal borrowing costs," Paul Van de Water from the nonpartisan Center on Budget and Policy Priorities wrote in a recent blog post.

"Under the present circumstances, even the serious threat of a US default could be enough to roil markets and further damage the global economy," he said.

In the unlikely event of a default, the consequences would be substantial, according to Eric Dor, director of economic studies at IESEG business school in France.

"The interest rates charged by investors on bonds issued by the United States would rise sharply," as would private debt, which uses US government debt as a benchmark, he said.

"This increase in the cost of credit would cause a drop in business and household investment, as well as in consumption, and thus a sharp recession in the United States," Dor continued, adding it could also cause a recession in Europe and elsewhere.

"A default would destabilize the global financial system, which depends on the stability of the dollar as the world's safe asset and primary reserve currency," Jean Ross from the nonpartisan Center for American Progress wrote in a recent article.

"A loss of confidence in the dollar could have far reaching economic and foreign policy ramifications, as other countries, particularly China, would use default to push for their currency to serve as the foundation of global trade," she said.

Could US debt be downgraded?

As the X-date draws closer, investors are nervously watching the ratings agencies for signs of a possible downgrade to US debt.

This last happened back in 2011, when a similar debt ceiling stand-off led ratings agency S&P to lower its US credit rating from AAA to AA+, drawing bipartisan outrage.

Even if the United States hits the debt ceiling but continues paying its bills, the ratings agencies will likely take note, according to Nathan Sheets from Citi, underscoring the need for a negotiated agreement ahead of time.

"Debates about whether or not you pay occurring periodically is typically not a feature that you would associate with a top credit" rating, he said.
Newsletter

Related Articles

Bermuda Post
0:00
0:00
Close
Paper straws found to contain long-lasting and potentially toxic chemicals - study
FTX's Bankman-Fried headed for jail after judge revokes bail
Blackrock gets half a trillion dollar deal to rebuild Ukraine
Steve Jobs' Son Launches Venture Capital Firm With $200 Million For Cancer Treatments
Israel: Unprecedented Civil Disobedience Looms as IDF Reservists Protest Judiciary Reform
Google reshuffles Assistant unit, lays off some staffers, to 'supercharge' products with A.I.
End of Viagra? FDA approved a gel against erectile dysfunction
UK sanctions Russians judges over dual British national Kara-Murza's trial
US restricts visa-free travel for Hungarian passport holders because of security concerns
America's First New Nuclear Reactor in Nearly Seven Years Begins Operations
Southeast Asia moves closer to economic unity with new regional payments system
Political leader from South Africa, Julius Malema, led violent racist chants at a massive rally on Saturday
Today Hunter Biden’s best friend and business associate, Devon Archer, testified that Joe Biden met in Georgetown with Russian Moscow Mayor's Wife Yelena Baturina who later paid Hunter Biden $3.5 million in so called “consulting fees”
Singapore Carries Out First Execution of a Woman in Two Decades Amid Capital Punishment Debate
Spanish Citizenship Granted to Iranian chess player who removed hijab
US Senate Republican Mitch McConnell freezes up, leaves press conference
Speaker McCarthy says the United States House of Representatives is getting ready to impeach Joe Biden.
San Francisco car crash
This camera man is a genius
3D ad in front of Burj Khalifa
Next level gaming
Google testing journalism AI. We are doing it already 2 years, and without Google biased propoganda and manipulated censorship
Unlike illegal imigrants coming by boats - US Citizens Will Need Visa To Travel To Europe in 2024
Musk announces Twitter name and logo change to X.com
'I just lost it' Lowe’s worker fired after 13 years of employment for confronting thieves trying to steal $2K of merchandise
The politician and the journalist lost control and started fighting on live broadcast.
The future of sports
Unveiling the Black Hole: The Mysterious Fate of EU's Aid to Ukraine
Farewell to a Music Titan: Tony Bennett, Renowned Jazz and Pop Vocalist, Passes Away at 96
Alarming Behavior Among Florida's Sharks Raises Concerns Over Possible Cocaine Exposure
Transgender Exclusion in Miss Italy Stirs Controversy Amidst Changing Global Beauty Pageant Landscape
Joe Biden admitted, in his own words, that he delivered what he promised in exchange for the $10 million bribe he received from the Ukraine Oil Company.
TikTok Takes On Spotify And Apple, Launches Own Music Service
Global Trend: Using Anti-Fake News Laws as Censorship Tools - A Deep Dive into Tunisia's Scenario
Arresting Putin During South African Visit Would Equate to War Declaration, Asserts President Ramaphosa
Hacktivist Collective Anonymous Launches 'Project Disclosure' to Unearth Information on UFOs and ETIs
Typo sends millions of US military emails to Russian ally Mali
Server Arrested For Theft After Refusing To Pay A Table's $100 Restaurant Bill When They Dined & Dashed
The Changing Face of Europe: How Mass Migration is Reshaping the Political Landscape
China Urges EU to Clarify Strategic Partnership Amid Trade Tensions
Europe is boiling: Extreme Weather Conditions Prevail Across the Continent
The Last Pour: Anchor Brewing, America's Pioneer Craft Brewer, Closes After 127 Years
Democracy not: EU's Digital Commissioner Considers Shutting Down Social Media Platforms Amid Social Unrest
Sarah Silverman and Renowned Authors Lodge Copyright Infringement Case Against OpenAI and Meta
Italian Court's Controversial Ruling on Sexual Harassment Ignites Uproar
Why Do Tech Executives Support Kennedy Jr.?
The New York Times Announces Closure of its Sports Section in Favor of The Athletic
BBC Anchor Huw Edwards Hospitalized Amid Child Sex Abuse Allegations, Family Confirms
Florida Attorney General requests Meta CEO's testimony on company's platforms' alleged facilitation of illicit activities
The Distorted Mirror of actual approval ratings: Examining the True Threat to Democracy Beyond the Persona of Putin
×