US on the debt ledge, will it fall?

June 1, the earliest date by which the US could default is just a little 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 did not reach a deal.

The looming question, however, is what happens if US defaults?

McCarthy and Republicans have been insisting on spending cuts, instead of raising the debt limit.

Meanwhile, “extraordinary measures” have been adopted by the US Treasury Department to maintain cash flow till the “hard deadline”, but without an agreement in Congress to raise the limit Treasury Secretary Janet Yellen has warned that the US may not meet its financial obligations by 1 June.

What is the debt ceiling?

The cap that the US Congress fixes on the amount of money that the federal government is allowed to borrow is called the debt ceiling.

The limit was introduced during World War I. Before that, approvals were given by the US Congress for every borrowing decision. It was just due to the complexity of financing during the war, a borrowing limit was introduced which came to be known as the debt ceiling.

It has been raised or suspended on several occasions. A crisis similar to what the US is facing now occurred in 2011 and 2013.

Congress votes to raise the debt ceiling enabling the Treasury Department to continue borrowing money to pay the nation’s incurred bills.

What’s the roadblock now?

The US is nearing to hit its debt ceiling, set at $31.4 trillion. Republicans have been wanting to roll back spending to 2022 levels and cap future spending for the next decade. However, Democrats aren’t willing to go that far to cut federal spending.

The White House, meanwhile, has proposed holding spending flat at the current 2023 levels. Some of the policy priorities are also under consideration including ways that could help speed the construction and development of energy projects that Republicans and some Democrats want.

For the unversed, no party holds full control of Congress. Republicans control the House 222-213, while Biden’s Democrats hold the Senate 51-49, which makes it difficult to reach a deal.

What if US defaults?

US will be at risk of defaulting on its debt if the government fails to raise or suspend the debt ceiling by 1 June. This would make it difficult for the country to pay all of its bills including payments to government workers, interest on the national debt, and benefits to citizens.

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

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

Financial Market could tank

Investors around the world keep an eye on US government bonds as it is one of the safest investments. They would be in a panic, leading to chaos in the financial market if US defaults.

Sell-off in the stock market and increases in interest rates are also possibilities in case of default.

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

Downgrade of credit rating

Currently, the US has a top-tier credit rating making it a reliable borrower, but if the US defaults, credit rating agencies could downgrade this 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 global economy

Considered to be one of the largest in the world, the economy of the US, if the country defaults, could have severe global consequences. There is a huge possibility of other countries experiencing financial market turmoil, economic slowdowns and increased borrowing costs.

With inputs from agencies

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