Debt default: The United States risks defaulting on its debts, with dire consequences if Congress does not act


Washington-The dispute over raising the country’s borrowing limits highlights reality as the Democratic Party is in the midst of the highest moments of President Joe Biden’s drastic legislative agenda. Including potential faults in the mix can have catastrophic consequences.

A mild recession is probably the best case scenario for the US government to default, analysts say the country is expected to hit next month and Congress needs to act to rise. Must be. Worst-case scenarios are the downstream impact of potentially chained unemployment, the closure of tens of billions of dollars in economic stimulus aid from Covid-19, the near-freeze in the credit market and the visible impact of GDP. understand. It can last several quarters.

“Not everyone will be spared,” Maya McGuineas, chair of the federal budget committee, told CNN. “When our role in the world is already called into question, it will be a willful catastrophe that we cannot recover. “

Moody’s Analytics said this week that the federal government is expected to implement “catastrophic” spending cuts as the Treasury defaults and prolongs the stalemate, causing a “catastrophic” situation in the economy. I warned.

Moody’s estimates that nearly 6 million jobs will be lost, unemployment will skyrocket to nearly 9%, stocks will drop to one-third and household wealth of around $ 15 trillion will be wiped out.

Failure to raise debt ceilings on time depends on millions of Americans, including federal workers’ wages, Medicare benefits, military salaries, tax refunds, government checks. social security and payments from federal contractors. The payment can stop.

Republicans are adamantly opposed to the offer of votes to raise debt ceilings, despite officials and observers calling for the dire consequences of neglecting or delaying such actions. ..

Former Treasury Secretaries Steven Mnuchin and Hank Paulson have said in recent weeks amid growing concerns in financial markets over possible U.S. defaults, according to three people familiar with the first reported debate. According to the Washington Post, he spoke to Senate Minority Leader Mitch McConnell about debt ceilings. After receiving it, the message given to contacts in the Biden administration was that McConnell had no plans to move away from his position that Democrats should increase their debt limits on their own.

“Basically, he is not bluffing,” explained the impression left to the former financial director of the last two Republican administrations.

A memo distributed by the White House to state and local authorities last week says Congress has been unable to increase its debt limits, including disaster relief efforts, Medicaid programs and children’s health insurance, infrastructure, education and public funding. There were some great programs listed in. Child health and nutrition.

“If the United States defaults and is unable to pay its obligations, state aid and state-owned but federally funded programs could suspend billions of dollars,” the White House said. There are. “

Subsequent market meltdowns will disrupt the retirement savings of countless families and increase the cost of mortgages, auto loans, and borrowing for businesses of all sizes.

All of this will trigger another recession that could bypass an incomplete economic return from Covid and require more federal borrowing to recover.

Confidence in US debt, the cornerstone of the global financial system, is likely to be irreversibly shaken.

In short, it is a catastrophic disaster for ordinary Americans, caused by extreme political dysfunction.

“Failure to raise debt limits will have catastrophic economic consequences,” the Treasury has warned on its website, and Congress has attempted to raise, expand or revise the definition of debt limits 78 times in the past. He added that he took action. The Treasury says 49 Republicans at the time were in the White House.

The clock is turning. The Treasury predicts that at some point next month there won’t be any treasury and accounting stuff unless Congress raises the debt ceiling.

When the federal borrowing limit is reached, Washington will not be able to issue new debt. This is unacceptable because the United States does not bring in enough revenue to pay for these expenses. You have to borrow to keep the light on.

Leaders of major financial advisory boards on Tuesday expressed deep concern about the impact on the market. In the event of a protracted dispute over debt restrictions, “the treasury market is likely to experience significant turbulence which may cause wider tensions in the market,” he explained in a letter to the secretary to the government. Treasure Janet Yellen. The head of the Provincial Loan Advisory Council wrote.

Stress means buying and selling the Ministry of Finance, an important area of ​​finance known as the repo market, can be difficult, investors pulling out money market funds and trading companies pulling out of money market activities. market making. There is a possibility of withdrawal.

“As we saw in March 2020, tensions in Treasury markets are unfolding in a chained and self-reinforcing fashion, spilling over into financial markets, tightening fiscal conditions and harming the still fragile economic recovery. Can give, ”wrote the letter’s author.

That’s why many on Wall Street and Washington expect Congress to do the right thing. This has happened in the past and it is safe to assume that it will happen again. If Congress raises its debt ceiling before the government runs out of cash, the impact on the market and the economy should be minimal.

On Tuesday, the House of Representatives passed a law suspending debt restrictions until December 2022, but that particular measure is not expected to be passed by the Senate.

Goldman Sachs recently warned its clients that it was “the riskiest 10-year debt limit.” This is the first time since the showdown of 2011 that rocked financial markets and caused an unprecedented deterioration in US debt.

For the first time in history, contractors and the like received, although many believe the federal government will continue to pay bondholders if Congress fails to raise its debt limits on time. Stop paying other promises like to a person.

This scenario, known as a “technical default,” is where the government continues to pay bondholders, but suspends payments to others for a period of time. However, there is debate as to whether the Treasury has the legal authority to prioritize payments.

Nevertheless, Eurasia Group estimates that there is a 20% chance of “abnormally high” technical faults, and the advisory group warns that this is a “market nightmare”.

“It is a mistake to dismiss these risks,” the consulting firm wrote in a report.

The Goldman Sachs strategist said the Treasury is “likely” to buy back treasury bills that continue to mature and pay coupons. However, Wall Street banks have said the government must suspend more than 40% of expected payments “including some payments to households”.

It is not clear whether technical flaws, rather than full fledged ones, will alleviate financial and financial difficulties.

David Kelly, chief global strategist at JPMorgan Asset Management, said the technical defaults “would be almost disastrous for the economy” but could limit the damage to US credit ratings in the long run. ..

“But it’s a terrible goal anyway,” Kelly said.

Mark Zandi, chief economist at Moody’s Analytics, believes there is no distinction between flaws and technical flaws.

“If the Treasury misses a payment, whether it’s a government bond or an electricity bill, it’s default and investors around the world will be rushing for the door,” said Zandy in an email.

Likewise, rating agencies that value US creditworthiness may not make a difference.

Charles Seville, chief US analyst at Fitch Ratings, told CNN in an email that he continues to expect debt limits to be raised before it is too late. Yet, he said, “delinquency of other government bonds to pay bondholders is not expected to be observed among AAA rated sovereigns.”

In other words, Fitch (and other rating agencies) could downgrade the United States, even if it continues to pay bondholders.

This increases federal borrowing costs and forces Washington to spend more and more resources to pay interest on existing debt piles.

Tax increases and spending cuts may be needed to make up for the differences, leaving much less room to invest in key needs such as education, science, childcare and the climate crisis.

The closer Congress gets to the deadline, the greater the risk of miscalculations and unwanted defaults on both sides. Millions of livelihoods are lost in this chicken game.

The-CNN-Wire ™ & © 2020 Cable News Network, Inc., Warner Media Company. All rights reserved.

Debt default: The United States risks defaulting on its debts, which would have dire consequences if Congress does not act

Leave A Reply

Your email address will not be published.