On May 22, United States President Joe Biden and Speaker of the House Kevin McCarthy met to discuss raising US’s debt ceiling, a legislative limit on the national debt which the US government can borrow. It is pertinent to note that a failure to reach a consensus on raising the debt ceiling, or suspending it altogether, then there are chances the US government might default which could be catastrophic for the world economy.
Kevin McCarthy said, “I believe we can get a deal done,” after his meeting with the US President although no agreement was reached. “We don’t have an agreement yet. But I did feel the discussion was productive in areas that we have differences of opinion. Biden and I will talk every day until we get this done,” he added.
The US President said, “I just concluded a productive meeting with Speaker McCarthy about the need to prevent default and avoid a catastrophe for our economy. We reiterated once again that default is off the table and the only way to move forward is in good faith toward a bipartisan agreement.”
Earlier, Treasury Secretary Janet L Yellen warned that the US could run out of money to pay its bills by June 1, if the debt ceiling is not raised or suspended, highlighting the limited time US lawmakers have to reach a consensus.
“Given the current projections, it is imperative that Congress act as soon as possible to increase or suspend the debt limit in a way that provides longer-term certainty that the government will continue to make its payments,” Janet Yellen said in a letter to US Congress.
What if the US defaults on its debt?
If the US government fail to raise the debt ceiling, or suspend it altogether, then it risks defaulting on its debt. The government’s default could cause a recession in the US, with catastrophic effects on the global economy.
The US government’s default would cause chaos in the financial markets. The investors, who viewed US government bonds as safe investments, might panic. The stock market could witness a significant sell-off. The citizens could witness an interest rate hike.
It is pertinent to note that due to a global reliance on the US Dollar, the impact would be devastating for the global economy as well. “No corner of the global economy will be spared,” warned Chief Economist at Moody’s Analytics Mark Zandi on the chance that the US defaults and that the crisis was not resolved quickly.
Furthermore, the US’s credit rating would be downgraded if it defaults making it tougher for it to borrow money in the future. If the US’s credit rating is downgraded, then the country would also have to pay a higher interest rate for future borrowings.
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