New dialogue, new failure. On Monday, May 22, Democratic President Joe Biden and Republican House of Representatives boss Kevin McCarthy failed to overcome their disagreements to resolve the US debt problem. They must resume their discussions on Tuesday, while the threat of bankruptcy of the world’s largest economy hovers.
In nine days, the United States may indeed find itself in the perilous situation of a default if the debt ceiling is not raised. This threshold, currently set at 31,400 billion dollars (about 29,150 billion euros), was reached in January and the Treasury has since been reduced to tinkering to maintain the solvency of the State. But these accounting adjustments have a limit which should be reached on the 1is June, the now famous “X-date”.
It is up to Congress, which has determined since 1917 the threshold from which the state can no longer borrow, to raise the debt ceiling. However, negotiations between the two parties have stalled for several weeks. To give the green light, the Republicans, who now have the majority in the House of Representatives and have a blocking minority in the Senate, are demanding a sharp reduction in public spending. What the Democrats refuse.
What would happen if Congress did not raise the debt ceiling in time?
The unknown
In American history, the debt ceiling has only been breached once. It was in 1979. A dispute over the raising of the debt – regular between the two major parties – had delayed the vote. This delay, coupled with an administrative mess, had led to a payment default.
This failure had at the time aroused the concern of the markets, quickly reassured by the State. But, in 1979, the American debt was at a level incomparable to that of today (barely 1,000 billion dollars), and no former president openly asked his supporters to push for default.
It is therefore by speculating that the Americans watch the calendar scroll by.
Choose your debt
If the “X-date” were to be exceeded, two options are available in the United States.
The economically rational solution would be to select debts by prioritizing the repayment of creditors. This alternative would allow the US Treasury to maintain market confidence while waiting for the situation to unblock.
Politically, this strategy is problematic. It would amount to preferring the reimbursement of China – the first creditor of the American Treasury – to that of federal agents, veterans or beneficiaries of Social Security. “This is not how the United States treats those who serve our nation”assure Joe Biden.
The other solution would be to pay the debts as they fall. This alternative is politically less perilous because it does not prioritize the debt. Financially, it is risky, because it accelerates the failure of the State without giving the parties time to find an agreement. Then, the result would be the cessation of payments of the world’s leading economic power.
End of refunds, and after?
To assess the damages of a cessation of payments, a question arises: who should the United States pay?
Within the country itself, let us look at the areas of competence of the federal state. The list is long: the army, federal agents, Social Security, retired civil servants, all subcontractors… or more broadly all Americans who receive state aid. Can one only imagine the United States failing in such obligations?
« When America sneezes, the world catches a cold. This saying of the XXe century could regain its full meaning in the coming weeks. Because the biggest creditors of the American debt are none other than States. China first, but also Japan, Ireland or Switzerland hold shares in the astronomical sum of American bonds. Failure to repay their debts would be tantamount to plunging these countries into a financial crisis. Treasury Secretary Janet Yellen referred to “an economic and financial disaster” with global repercussions.
The longer term consequence for Washington would be a loss of market confidence. While repayment determines the States’ ability to borrow at low cost, a default in payment would have the effect of increasing the cost of the debt.
2023-05-23 16:27:58
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