In a crucial development amid the looming US debt crisis, President Joe Biden is set to meet with House Speaker Kevin McCarthy on Monday to negotiate a resolution. Both leaders, who had a “positive” phone conversation on Sunday, convened in a high-stakes bid to avert a catastrophic default that could shake the global economy. Despite the urgency, no agreement has been reached yet, and with the June 1 deadline fast approaching, the world watches on with bated breath.) (ALSO READ: Call with house speaker McCarthy ‘went well’, says President Joe Biden)
The Risk of Default
If the US government can’t agree to raise or suspend the debt ceiling, it risks defaulting on its debt. This means it would be unable to pay all of its bills. These bills include payments to government workers, interest on the national debt, and benefits to citizens. It would be the first time in history that the United States has defaulted on its federal debt.
Financial Market Turmoil
A US default would likely cause chaos in the financial markets. Investors around the world, who view US government bonds as one of the safest investments, might panic. This could lead to a significant sell-off in the stock market and an increase in interest rates. In turn, higher interest rates could make it more expensive for individuals and businesses to borrow money, slowing economic growth.
“If the trustworthiness of (Treasury) would become impaired for any reason, it would send shockwaves through the system…,’’ said Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund.
Downgrade of US Credit Rating
The United States currently has a top-tier credit rating, which means it’s seen as a reliable borrower. If the US defaults, credit rating agencies could downgrade this rating. A lower credit rating would make it more expensive for the US government to borrow money in the future. It could also decrease the value of the US dollar in foreign exchange markets.
Global Economic Impact
The US economy is one of the largest in the world, so a US default could have severe global consequences. Other countries might experience financial market turmoil, economic slowdowns, and increased borrowing costs. In short, a US default could spark a global economic crisis.
“No corner of the global economy will be spared’’ if the U.S. government defaulted and the crisis weren’t resolved quickly, said Mark Zandi, chief economist at Moody’s Analytics.
Political Consequences
A default could impact the Biden political aspirations for future elections. It could influence policy decisions on a range of issues forcing the Biden administration could to make cuts to Social Security and Medicare schemes. A plan passed by the House last month would cut government spending by 8% next year.
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President Biden, who previously refused to negotiate on the debt ceiling, is now actively seeking a solution. He insists that Republicans pass an “unconditional” increase before engaging in spending negotiations. During his visit to Japan, Biden acknowledged the potential economic consequences of a default, said that certain far-right House Republicans “know the damage that it would do to the economy” and suggesting that they may aim to place the blame on him to hinder his re-election chances.
