2023-05-03 07:41:22
BarcelonaThe United States government could run out of money to pay its obligations as of June 1, according to the Secretary of the Treasury -equivalent to the Secretary of the Economy-, Janet Yellen, in a letter sent to the President on Monday of the US Congress, Kevin McCarthy. Yellen is asking Congress to urgently approve a suspension or extension of the debt ceiling, which gives the executive power to continue borrowing.
What is the debt ceiling?
The debt ceiling (debt ceiling, in English) is the maximum debt limit of the US federal government. The US Constitution gives Congress the power to set that ceiling after negotiating it with the government, although lawmakers have the final say.
What is the US government asking for?
So far, Congress has not renewed the debt ceiling, and Yellen has asked congressmen to either suspend the ceiling or approve a higher one. “Given current projections, it is imperative that Congress act as soon as possible to raise or suspend the debt limit in a way that provides long-term certainty that the government will continue to meet its payments,” the letter from the Secretary of the Treasury.
What if Congress doesn’t act?
The federal government will run out of money and therefore will not be able to pay the debt, the interest on the debt, the bills or the payroll of the public workers. Yellen calculates that on June 1 the US Treasury could run out of liquidity. “We will be unable to continue meeting all of the government’s obligations in early June, potentially even on June 1,” the letter warns, although it notes that it could also be later.
If the US government defaults on its debts, it would automatically go into bankruptcy. A bankruptcy of the administration of the world’s first economy would have consequences that are difficult to predict for the world economy, because it has never happened, but they would be very negative: the American debt would shoot up the interest it pays, the dollar – main global reserve currency – would be drastically devalued and the stock markets would suffer falls typical of the great crises of the past. Yellen sees that US credibility in the markets may be damaged, so she is asking Congress to act now: “I respectfully urge Congress to protect the full faith and credit of the United States by acting as soon as possible.”
If a new debt ceiling is not passed, the US government will go bankrupt, with unpredictable consequences for the world economy”
“We have learned from past impasses over the debt limit that waiting until the last minute to suspend or raise the debt limit can seriously damage business and consumer confidence, raise short-term borrowing costs by to taxpayers and negatively impact the rating of the United States,” recalls the Secretary of the Treasury. If there is no ceiling increase, then, families would be in “severe difficulties” and the US’s “global leadership position” would be damaged, Yellen says.
How much debt does the US have?
31.4 trillion dollars (28.6 trillion euros) is the total debt accumulated by the United States. At the end of the fourth quarter of 2022, the debt was equal to 123.4% of the gross domestic product (GDP, the indicator that measures the size of an economy), two tenths less than in the third quarter and a high figure, but that it does not represent an imminent danger to the country that issues the world reference currency. For comparison, Spain had a debt of 113.2% in 2022 and Japan, the most indebted developed economy, 263%.
Why does Congress not act?
The decision to raise the debt ceiling has nothing to do with the financial situation of the American administration. “It’s a political weapon,” summarizes Xavier Brun, director of the master’s degree in financial markets at the UPF and fund manager at Trea AM: Congress is dominated by the Republican Party, while President Biden is a Democrat. A group of Republican congressmen are demanding compensation for extending the ceiling, when traditionally it had been considered a simple procedure: between 1960 and today, Congress has raised the government’s debt limit 78 times.
“I respectfully urge Congress to protect the full faith and credit of the United States by acting as soon as possible.”
Janet Yellen Secretary of the Treasury of the United States
It wasn’t until 2011 and 2013, with Obama in office, that Republicans used their control of Congress to get tax cuts in exchange for threatening to expire the debt ceiling and, in return, with the bankruptcy of the country. When Democrats controlled Congress during the presidency of Republican Donald Trump, they never used this letter as a negotiating tool.
How have the American economic fabric and financial investors received it?
The situation is serious, but for now there is a widespread belief that, as in 2011 and 2013, the two sides will reach an agreement. “There are nerves, but he hasn’t worried in an exaggerated way,” explains Brun.
Despite this, the S&P500 index, which groups the 500 largest industrial companies in the US, was down 1.51% at 6.45pm (10.45am New York), but not because of fears of a possible debt default, but because the Purchasing Managers’ Index (PMI) data pointed to a drop in industrial production in China, due to the rescue of the American bank First Republic and the possible increase of 0.25 percentage points in interest rates basics that the Federal Reserve is expected to approve on Wednesday.
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