500 basis points interest rate hike from the Federal Reserve (Fed) from March 2022 haven’t done massive bank losses those with outstanding public debt. Also at the central bank, which has the largest portfolio of bonds on its balance sheet since post-pandemic purchases by value billions of dollars, But the effect that was least magnified was its upward impact on the US public debt and this has been an accelerant until it is on the verge of ‘collapse’.default, there is a reason: The cost of repaying that loan has skyrocketed,
In particular, according to estimates by the Swiss firm Julius BaerHe annual interest payments from the US Treasury increased by 41% during 2022, to $518,000 million, and is expected to grow by another 28%, up to 663,000 million in this 2023, In this way, the cost of keeping the loan payments up to date to the federal public treasury would face an increase of more than 300,000 million in just two years. This is one of the reasons for the increase in debt, but it’s a growing problem, Whenever Treasury maturities approach the market for refinancing, its costs increase and already exceed 2% of its total debt.
“Let us not forget that the US Treasury was one of the big beneficiaries of the Fed’s accommodative monetary policy. Zero interest rates allowed the government to refinance almost for free, In the global financial crisis that began in 2007, the Treasury was able to auction off its bills at discount rates close to 0%. It’s over,” he insisted. yves bonsonChief Investment Officer (CIO) at Julius Baer, ​​who recalls US refinancing is above 5% in the short term and near 4% in the long term,
There is one more issue that affects the Federal Reserve (Fed) and which may force it to change its monetary policy prematurely. has caused rates to rise The Fed is paying more for its reserves than for its assetsMost of them bought at near-zero interest rates in the last crisis, and need Treasury transfers to make up for it and, according to Bonzon, will soon have to pay a third of their income in debt service.
In his opinion, this position means that there is a political limit to Jerome Powell’s claims of more rate hikes by the central bank. ,The Fed must accept a permanently high inflation rate and soon regain a level of lower and more sustainable interest rates”, notes the experts at Julius Baer. In other words, the possibility of cutting interest rates in the US in 2023 is getting closer once inflation is over. it’s just a matter of time.
loan roof slope
On the weekend, the negotiating teams Joe Biden (Democratic Party) and Kevin McCarthy (Republicans) announced that they Current public debt limit of $31.5 trillionHowever, the draft must be endorsed by congressmen and senators this week before a new deadline (June 5) set by the Treasury.
As per this notional agreement, the limits on the credit limit would be suspended for two years. “The tax deduction amount Directly attributable to the deal is going to be minimal, and likely to make only a small dent in the US growth trajectory for next year,” he says. Gilles MoecChief Economist at AXA I.M.
only mentioned Budget cuts, symbolic and small, a momentary change in the spending policy landscape of the Biden administration, though it continues without addressing the long-term structural problems posed by the enormous US public debt and its associated rising financing costs, the aforementioned servicing of the debt. ,The long-term drift of US public finance remains unresolvedMok adds.
McCarthy and Biden documents include specific items that have been revealed via the US press considers tightening requirements Will impose spending limits on access to food subsidies received by certain groups of workers for another two years. The red line that hasn’t been crossed is being spent defendingWhich will grow 3.5% next year to more than $800,000 million a year, but others will be scissors.
“It is unlikely that Bill is put to vote before Wednesday, and must pass the House before going to the Senate. A slightly longer deadline would give Congress more time to get it done. Initial reactions from delegates indicate that the bill is likely to pass, but it will be important to see whether opposition to the bill grows outside the Republican right wing, which would indicate further difficulties,” he said. lizzie galbraitheconomist specializing in political affairs abrdon,
Chances of a Divided Congress The fragmentation of the vote within both parties, as well as the experience of previous US debt limit negotiations, means that a default is unlikely, but the risk of a (partial) shutdown of the US government is “very real”, as he warned. Claudio Wavellon currency strategist J Safra Sarasin Sustainable AM,
“Since this is a very delicate matter, There is a real risk that an agreement will not be reached before “date X”. However, this will not automatically trigger the default, which remains an unlikely scenario in our view. To the contrary, we expect the Treasury to prioritize servicing its debt over other payments, even if its Treasury limits are reached,” warned Wavell. In any case, resolution is ongoing.
