Wednesday, June 7, 2023

What if the United States defaulted?

The United States reached the debt ceiling in January and since then the country has been on a countdown to the deadline for the elimination of the debt limit. Without this agreement, the consequences would be “disastrous” according to the President of the Financial Commission of the General Economic Council, Antonio Pedraza.

The limit is the ceiling on the summer of the US government’s budget set at 31.4 trillion dollars. When the treasury is overrun, it spends on extraordinary measures for expenditure, and as a result the margin is extended to the agreement.

In the last official statement by the Secretary of the Treasury, Janet Yellen, he declared that it is probable that this institution will not be able to pay all its obligations as of June 1. Although in this letter, the secretary also mentioned that it is impossible to determine the exact date when the US will run out of liquid. In this regard, the director of the market strategy at Ostrum AM, Axel Botte, mentions that “The General Fund account already has less than 200,000 million, and public expenditure can reach 600,000 million dollars per month”.

Pedraza believes that the default situation is “very unlikely” and acknowledges that he is concerned about the football situation. The parties promise a future agreement as they have already done in 2011, and this future through government grants that involve cuts in public spending.

He adds that “at this time the chambers are being forced to come to an agreement as quickly as possible from the consequences of not doing so”, and “if there is a delay, it will be short”. Although he believes that this should be concluded “as quickly as possible” since “the market, whether fixed income or variable, tends to progress”. However, he says that “it is time” when they are confident that the situation will be resolved as it has happened on other occasions.

Because of the delay in the agreement

The session that Pedraza sees is most likely to be too long for the parties to agree and the market will react, as it did in 2011. A year in which, for this very reason, S&P lowered the US credit rating. In his opinion, this place will not happen either.

In the event that time is relevant to the agreement, the consequences, according to experts, would be similar to those of 2011, although “somewhat worse” due to the current context of growth and the constant rise in interest rates. Pedraza explains that the moment before consent of this kind “makes the courts very nervous and punishes immediately”. It means that, in addition to affecting the credit rating, “there is an impact on the stock market not only in the United States, but in the whole world.” He also added that it had a great impact on the already depreciated dollar, which would be very negative for the American economy. He concludes that, despite the fact that this consequence occurs, it will not last long and will take longer to reach the domestic economy and the business fabric.

In this case, Raymond Torres, director of the Conjuncture of Funcas, adds other possible effects due to the use of extraordinary measures, such as a delay in the payment of official salaries or financial benefits from the Government. “Which “would have an impact on demand”. Furthermore, he believes that if he were to write down spending limits, this would result in chronic deficits in the American public treasury.

Consequences of lack of liquidity

“In the event of a government default, many institutions, domestic and foreign, and investors who hold treasury securities,” says Botte. To which Pedraza adds that it involves very serious consequences, as it “does not respond to the maturities of the US debt, does not pay the authorities or the public sector is constrained” and lead to “impotence due to excessive demand”.

Torres adds that if the parties have not reached an agreement and that the ceiling on the debt of the currency must be complied with, the Government will adjust spending cuts and strive to increase revenues. The case of default would have two fundamental effects: “uncertainty and a rise in interest.” That would undermine the income of American families and companies and would have a recession, he explains. It should also have economic effects since US Treasury bonds and foreign exchange reserves are essential in the markets.

Nation World News Desk
Nation World News Desk
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