government’s debts - Treasury bills, bonds and notes - carry a “risk weighting” of zero in international bank regulations. Treasurys are widely used as collateral for loans, as a buffer against bank losses, as a haven in times of high uncertainty and as a place for central banks to park foreign exchange reserves. and have immense consequences for global growth,” said Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund. “If the trustworthiness of would become impaired for any reason, it would send shock waves through the system. House Speaker Kevin McCarthy reported no progress after negotiating at the White House with President Biden over an increase in the debt limit to pay the nation’s bills. Politics Kevin McCarthy, facing his biggest test yet, reports no movement on debt limit deal Treasury Secretary Janet Yellen has warned that the government could default as soon as June 1 if lawmakers don’t raise or suspend the ceiling. Partisan divisions in Congress have widened while the debt has grown after years of rising spending and deep tax cuts. Congress has raised, revised or extended the borrowing cap 78 times since 1960, most recently in 2021. In the past, American political leaders generally managed to step away from the brink and raise the debt limit before it was too late.
On top of all that, many countries have grown skeptical of America’s outsize role in global finance. The threat has emerged just as the world economy is contending with a panoply of threats - from surging inflation and interest rates to the ongoing repercussions of Russia’s invasion of Ukraine to the tightening grip of authoritarian regimes. and global financial markets,’’ said Eswar Prasad, professor of trade policy at Cornell University and senior fellow at the Brookings Institution. “A debt default would be a cataclysmic event, with an unpredictable but probably dramatic fallout on U.S. A default could shatter the $24-trillion market for Treasury debt, freeze financial markets and ignite an international crisis. Its debt, long viewed as an ultra-safe asset, is a foundation of global commerce, built on decades of trust in the United States. will always pay its financial obligations. The Republicans have threatened to let the government default on its debts by refusing to raise the statutory limit on what it can borrow unless President Biden and the Democrats accept sharp spending cuts and other concessions.įeeding the anxiety is the fact that so much financial activity hinges on confidence that the U.S.
The White House and House Republicans, seeking a breakthrough, concluded a round of debt-limit negotiations Sunday, with plans to resume talks Monday. economic growth would sink, 7.8 million American jobs would vanish, borrowing rates would jump, the unemployment rate would soar from the current 3.4% to 8% and a stock-market plunge would erase $10 trillion in household wealth, they concluded. economy would weaken so much, so fast, as to wipe out roughly 1.5 million jobs.Īnd if a government default were to last much longer - well into the summer - the consequences would be far more dire, Zandi and his colleagues found in their analysis. Zandi and two colleagues at Moody’s have concluded that even if the debt limit were breached for just a week, the U.S.
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