Budapest Post

Cum Deo pro Patria et Libertate
Budapest, Europe and world news

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.
AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

0:00
0:00
Close
16 Billion Login Credentials Leaked in Unprecedented Cybersecurity Breach
Senate hearing on who was 'really running' Biden White House kicks off
Hungary Ranked Among the World’s Safest Travel Destinations for 2025
G7 Leaders Fail to Reach Consensus on Key Global Issues
FBI and Senate Investigate Allegations of Chinese Plot to Influence the 2020 Election in Biden’s Favor Using Fake U.S. Driver’s Licenses
Trump Demands Iran's Unconditional Surrender Amid Escalating Conflict
Shock Within Iran’s Leadership: Khamenei’s Failed Plan to Launch 1,000 Missiles Against Israel
Wreck of $17 Billion San José Galleon Identified Off Colombia After 300 Years
Man Convicted of Fraud After Booking Over 120 Free Flights Posing as Flight Attendant
Iran Launches Extensive Missile Attack on Israel Following Israeli Strikes on Nuclear Sites
Beata Thunberg Rebrands as Beata Ernman Amidst Sister's Activism Controversy
Hungarian Parliament Approves Citizenship Suspension Law
Prime Minister Orbán Criticizes EU's Ukraine Accession Plans
Hungarian Delicacies Introduced to Japanese Market
Hungary's Industrial Output Rises Amid Battery Sector Slump
President Sulyok Celebrates 15 Years of Hungarian Unity Efforts
Hungary's Szeleczki Shines at World Judo Championships
Visegrád Construction Trends Diverge as Hungary Lags
Hungary Hosts National Quantum Technology Workshop
Hungarian Animation Featured at Annecy Festival
Israel Issues Ultimatum to Iran Over Potential Retaliation and Nuclear Facilities
UK and EU Reach New Economic Agreement
Coinbase CEO Warns Bitcoin Could Supplant US Dollar Amid Mounting National Debt
Trump to Iran: Make a Deal — Sign or Die
Operation "Like a Lion": Israel Strikes Iran in Unprecedented Offensive
Israel Launches 'Operation Rising Lion' Targeting Iranian Nuclear and Military Sites
UK and EU Reach Agreement on Gibraltar's Schengen Integration
Israeli Finance Minister Imposes Banking Penalties on Palestinians
U.S. Inflation Rises to 2.4% in May Amid Trade Tensions
Trump's Policies Prompt Decline in Chinese Student Enrollment in U.S.
Global Oceans Near Record Temperatures as CO₂ Levels Climb
Trump Announces U.S.-China Trade Deal Covering Rare Earths
Smuggled U.S. Fuel Funds Mexican Cartels Amid Crackdown
Austrian School Shooting Leaves Nine Dead in Graz
Bezos's Lavish Venice Wedding Sparks Local Protests
Europe Prepares for Historic Lunar Rover Landing
Italian Parents Seek Therapy Amid Lengthy School Holidays
British Fishing Vessel Seized by France Fined €30,000
Dutch Government Collapses Amid Migration Policy Dispute
UK Commits to 3.5% GDP Defence Spending Under NATO Pressure
Germany Moves to Expedite Migrant Deportations
US Urges UK to Raise Defence Spending to 5% of GDP
Israeli Forces Intercept Gaza-Bound Aid Vessel Carrying Greta Thunberg
IMF Warns of Severe Global Trade War Impacts on Emerging Markets
Low Turnout Jeopardizes Italy's Citizenship Reform Referendum
Transatlantic Interest Rate Divergence Widens as Trump Pressures Powell
EU Lawmaker Calls for Broader Exemptions in Supply Chain Legislation
France's Defense Spending Plans Threatened by High National Debt
European Small-Cap Stocks Outperform U.S. Rivals Amid Growth Revival
Switzerland Proposes $26 Billion Capital Increase for UBS
×