3 scenarios related to US public debt negotiations

After the meeting on May 19, US debt ceiling negotiators are not sure when they will sit down together again because the two sides have not been able 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 talks would resume. Mr. Biden said he would meet Mr. McCarthy again on May 22.

US lawmakers have just days to act before the impasse affects the economy. If debt ceiling negotiations 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.

While 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 or no deal.

US President Joe Biden made a phone call with House Speaker Kevin McCarthy after attending the G-7 summit in Hiroshima, Japan. Photo: Bloomberg

The deal was reached at the last minute.

Rising interest rates have slowed the US economy. Many economists predict that the country will experience a recession this year.

As lawmakers continue to “wrestle” over the debt ceiling, uncertainty could cause consumers, investors and businesses to cut back on spending, increasing the likelihood of a recession, said Joel Prakken, chief U.S. economist at S&P Global Market Intelligence.

American workers are unlikely to lose their jobs, but the uncertain economic outlook could cause them to put off shopping.

Stocks could also start to fall as June 1 approaches. In 2011, when Congress raised the debt ceiling just hours before the deadline, stocks fell sharply and took months to recover, Prakken said. The U.S. credit rating was subsequently downgraded from AAA to AA+.

“Even if we reach a last-minute deal before the US runs out of money, the uncertainty could still hold back economic growth,” Prakken said.

In March, S&P Global Market Intelligence predicted that a financial crisis similar to the one that hit the U.S. in 2011 could slow U.S. gross domestic product (GDP) growth by 0.1% year-over-year in the fourth quarter of 2023. If all goes well, GDP would grow by 0.6%, the organization estimated.

Deal after deadline

If the talks drag on beyond June 1, financial markets will react sharply as the possibility of default approaches, economists predict.

“The shock will tend to spread quite quickly after June 1,” said Gregory Daco, chief economist at credit rating agency Ernst & Young.

If consumers’ retirement accounts and investments suddenly dwindle, they could dramatically cut back on spending, the lifeblood of the U.S. economy. Meanwhile, businesses could pause hiring and investment plans.

In fact, the US default date could be later than June 1. US Treasury Secretary Janet Yellen has said that the date they run out of cash could be days or even weeks later than estimated.

The likelihood that the US will be able to continue paying its bills until June 15 is very low, according to US Treasury Secretary Janet Yellen. Photo: Reuters

The Bipartisan Policy Center projects the US will spend $622.5 billion in June, while collecting $495 billion in taxes. The exact timing of those 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. That would have a noticeable economic impact, but less severe than a default, according to economists at Switzerland's largest bank UBS.

Under this scenario, US GDP would fall 2% year-on-year in the third quarter and fall further in the fourth quarter, while about 250,000 workers would lose their jobs in the second half of this year.

As the US economy weakens, inflation is likely to fall, as the Federal Reserve wants. The US central bank may also cut interest rates to help offset some of the economic weakness.

No agreement reached

If US negotiators fail to reach a deal and the government is unable to pay all its bills for a long time, the consequences could be dire.

“There will be chaos in the global financial system because US government bonds are so important. What happens when the asset that is used as a reference for global borrowing rates becomes the riskiest asset class?”, Ms. Wendy Edelberg, an economist at the Brookings Institution, worried.

According to Mr. Daco, if the US defaults, a recession more severe than the 2007-2009 global financial recession will occur.

The value of Treasuries would fall as investors sold, potentially permanently reducing their holdings. The halt in payments would disrupt trillions of dollars of short-term dollar borrowing, a flow that is vital to banks and businesses.

US House Speaker Kevin McCarthy will continue negotiations 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 these assets falls, their balance sheets will be affected. The recent run on banks has been driven by the decline in the value of Treasury bonds. In the event of a US default, the decline could be much larger.

Analysts predict that many investors will flee risky assets. A White House report said that the stock market will plummet 45% in the coming months, and the unemployment rate will increase by 5%. According to UBS, a month-long shutdown will cause the economy to shrink for a year.

In 2020, the US government pumped 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, the White House report said .

Nguyen Tuyet (According to WSJ, Reuters)

Source: https://www.nguoiduatin.vn/3-kich-ban-lien-quan-den-dam-phan-no-cong-cua-my-a608969.html