Friday, June 9, 2023

US debt crisis threatens recession

Global panic is growing as June 1 approaches. And this is not a biblical prophecy but a potential financial crisis, so painful that no one wants to experience it.

America is the largest economy in the world and is almost always the focus of apocalyptic movies. There is no imagination in this case, a problem that, like any epidemic, can quickly cross borders.

Currently, the US government cannot take more credit than it already has. Has reached legal limit of US$31.4 trillion and needs permission from Congress to take on new debt and meet its obligations (public wage and sovereign debt).

Moody’s, one of the most recognized risk rating agencies, has already painted some of the scenarios that await the country if it is not allowed to access fresh credit and face its creditors.

High unemployment and recession

A team of Moody’s researchers estimated that If the government doesn’t pay off the debt of its lenders, the economy will immediately shrink by 1%, In other words, it will be a cut in asset production for the second quarter that will reduce consumption and require new jobs to be created.

in that respect, Experts estimate that the unemployment rate rises to 3.4% to 5%, which translates into 1.5 million unemployed workers., However, this prediction paints a scenario in which a default occurs but then Congress allows borrowing capacity to increase in the short term.

If there is no quick answer, the research team suggests that the stock market will fall by 20% and that too Additional unemployment for 8 million people would result.

What is worrying about the matter is that, in the face of a strained economy and an angry labor market, the government could not launch a lifeline, as it almost always does, because it has the wherewithal to revive productive activity with investment. There will be no cash. in public works.

In short, with the government in dire financial straits, the recession will deepen and have consequences for the rest of the countries that depend on the US economy in one way or the other.

To Gregorio Gandini, market analyst, “The recession in the US will affect other economies in terms of trade. If consumption decreases, purchases from other countries decrease., It should be noted here that, for example, Colombia exports US$12,361 million in the first quarter of 2023 and 26% went to the US, being the first trading partner.

A long shot

José Ignacio López, director of economic research at Corficolombiana, had explained that the noise about a possible default on the debt ceiling and obligations in the US has become recurring and that it is difficult to predict the consequences of the worst-case scenario ( … ) but That financial noise can, paradoxically, generate an appreciation of the dollar and a devaluation of emerging currencies, which ultimately end up paying the piper. It would be unfavorable for the Colombian peso and for our assets.” Although he admitted that it is a long shot.

For Alexander Rios, analyst at Inversia, although the probability of this catastrophe is very low, if it becomes real, there will be many effects. Among them more pressure on the value of the dollar in the country, something that has not helped inflation. And similarly, higher interest rates will come for medium and long term loans, which will have an impact on the new housing market.

For now, US President Joe Biden has held meetings with the Republican opposition to reach an agreement and thus raise the debt band. There is still no consensus as they are asking him to cut public spending and this will affect his government programmes.

Nation World News Desk
Nation World News Desk
Nation World News is the fastest emerging news website covering all the latest news, world’s top stories, science news entertainment sports cricket’s latest discoveries, new technology gadgets, politics news, and more.
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