Following their May 19th meeting, US debt ceiling negotiators are unsure when they will meet again, as the two sides have yet to find common ground.
However, after President Joe Biden returned to Washington from the G7 summit and spoke by phone with House Speaker Kevin McCarthy, both leaders said they had a positive discussion about resolving the crisis and that negotiations would resume. Biden said he would meet with McCarthy again on May 22nd.
US lawmakers have only days left to act before the deadlock impacts the economy . If negotiations on the debt ceiling drag on, the US economy could fall into recession. Meanwhile, if the US government fails to meet its obligations, it could trigger a serious financial crisis.
Although a US default is not something economists want to see happen, they have also pointed out the potential impacts on the US economy and financial system in the event of a deal being reached or not.
US President Joe Biden held a phone call with House Speaker Kevin McCarthy after attending the G-7 summit in Hiroshima, Japan. Photo: Bloomberg
The agreement was reached at the last minute.
Rising interest rates have slowed the growth of the US economy. Many economists predict that the country will experience a recession this year.
According to Joel Prakken, chief US economist at S&P Global Market Intelligence, as lawmakers continue to debate the debt ceiling, uncertainty could lead consumers, investors, and businesses to cut spending, increasing the likelihood of a recession.
American workers are unlikely to lose their jobs, but the uncertain economic outlook could cause them to slow down their spending.
Stock prices could also start to fall as June 1st approaches. Mr. Prakken noted that in 2011, when Congress raised the debt ceiling just hours before the deadline, stocks plummeted and took months to recover. Subsequently, the U.S. credit rating was downgraded from AAA to AA+.
"Even if we reach a last-minute agreement, before the U.S. runs out of funds, uncertainty could still stifle economic growth," Prakken said.
In March, S&P Global Market Intelligence predicted that financial instability similar to that of 2011 could slow the pace of U.S. gross domestic product (GDP) growth in the fourth quarter of 2023 to 0.1% year-on-year. If all goes well, the organization estimated that GDP would grow by 0.6%.
Agreement after the deadline
If negotiations drag on beyond June 1st, financial markets will react sharply as the possibility of default grows closer, economists predict.
"The shock will tend to spread fairly quickly after June 1st," according to Gregory Daco, chief economist at credit rating agency Ernst & Young.
If consumers' retirement and investment accounts suddenly shrink, they may significantly cut spending, which is the lifeblood of the American economy. Meanwhile, businesses may pause hiring and investment plans.
In fact, the date of the US default may be later than June 1st. US Treasury Secretary Janet Yellen has said that the date they run out of cash could be a few days or even weeks later than estimated.
The likelihood that the U.S. will be able to continue paying its bills until June 15 is very low, according to U.S. Treasury Secretary Janet Yellen. Photo: Reuters
The Bipartisan Policy Center projects the U.S. will spend $622.5 billion in June, while collecting $495 billion in taxes. The precise timing of these inflows and outflows affects cash reserves.
Another possibility is that, in the short term, the US government will prioritize debt payments over other payments, such as social security benefits. According to economists at UBS, Switzerland's largest bank, this would have a noticeable economic impact, but less severe than a default.
According to this scenario, the US's annual GDP would decline by 2% in the third quarter and further in the fourth quarter, while approximately 250,000 workers would lose their jobs in the second half of this year.
As the U.S. economy weakens, inflation is likely to fall, as desired by the Federal Reserve. The central bank may also cut interest rates to help offset some of the economic weaknesses.
No agreement was reached.
If U.S. negotiators fail to reach an agreement and the government is unable to pay all its bills for an extended period, the consequences will be enormous.
"There will be chaos in the global financial system because U.S. government bonds are so important. What happens when the asset used as a benchmark for global borrowing rates becomes the riskiest asset class?" worried Wendy Edelberg, an economist at the Brookings Institute.
According to Daco, if the US defaults on its debt, a recession more severe than the 2007-2009 global financial recession will occur.
The value of Treasury bonds will fall as investors sell off, potentially permanently reducing their holdings. The stalled payments will disrupt trillions of dollars worth of short-term USD borrowing. This flow of capital is critically important to banks and businesses.
US House Speaker Kevin McCarthy will continue talks with President Joe Biden and members of the Republican and Democratic parties on May 22. Photo: Politico
Investment funds, companies, and banks all hold Treasury bonds, so if the value of this asset falls, their balance sheets will be affected. The recent wave of bank runs has stemmed from the decline in the value of Treasury bonds. In the event of a U.S. default, the decline could be even greater.
Analysts predict that many investors will flee risky assets. A White House report stated that the stock market would plummet by 45% in the coming months, and unemployment would rise by 5%. According to UBS bank, a month-long stalemate would lead to a year-long economic contraction.
In 2020, the US government injected trillions of dollars to stimulate the economy after more than 20 million jobs were lost due to Covid. But this time, Washington will not be able to provide support, according to a White House report .
Nguyen Tuyet (According to WSJ, Reuters)
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