Ministry of Planning and Investment talks about the risk of US default

In a report sent to National Assembly Deputies, the Ministry of Planning and Investment explained its proposal to prepare solutions to respond to the risk of the US declaring bankruptcy and exceeding the public debt ceiling to minimize the impact on Vietnam's economy.

The Ministry of Planning and Investment said that the US is the world's largest public debt market. The public debt level reached a ceiling of 31,400 billion USD in January 2023. The US accounts for about 1/3 of the total global bonds and US Treasury bonds are considered the leading risk-free asset, providing guaranteed returns for large and small investors and governments of many countries. This is also the basis for pricing other financial instruments.

Currently, the risk of the US declaring bankruptcy is imminent if the US debt ceiling is not raised by early June 2023. If the US has to declare bankruptcy, the consequences will be very severe and have a profound impact on the entire world economy.

The first and most direct impact is that investors will lose confidence in the US dollar, causing the economy to weaken rapidly. Default could lead to a US economic recession.

Moody's Analytics estimates that immediately after a default, the US economy would shrink by nearly 1% and the unemployment rate would rise from 3.4% to 5%, leaving about 1.5 million people out of work.

The US temporarily escapes the risk of bankruptcy. (Photo: Hoang Ha)

For Vietnam, the Ministry of Planning and Investment believes that if the US defaults, it could affect Vietnam's economy through three main channels: exports; the stock market and the currency and foreign exchange markets.

To cope with the risk of US default, the Ministry of Planning and Investment believes that it is necessary to prepare a number of solutions as follows: Firmly and flexibly manage monetary policy tools, ensure liquidity and safety of the banking system, be ready with intervention measures to handle pressures on interest rates and exchange rates, and ensure stable and smooth management of the monetary and foreign exchange markets.

In addition, the Ministry also recommends solutions on communication, strengthening and stabilizing investor sentiment in the financial and stock markets; Continuing to diversify production activities for export and export markets to avoid dependence on a few markets.

In addition, continue to resolutely, synchronously and effectively implement solutions to support and remove difficulties and obstacles for people and businesses to restore investment in production and business, expand the domestic consumer market, increase the resilience of the economy; accelerate the implementation of the Socio-Economic Recovery and Development Program, focusing on accelerating the effective disbursement of public investment capital. Study the possibility of implementing an expanded Socio-Economic Recovery and Development Program for the period up to 2025;

"Closely monitor the policy responses of major countries and partners, and the movement of regional and global investment flows to continue to have appropriate and effective policies and solutions to attract foreign investment," the Ministry of Planning and Investment noted.

However, the Ministry of Planning and Investment also updated information from the US showing that US President Joe Biden of the Democratic Party and House Speaker Kevin McCarthy of the Republican Party reached an agreement in principle late on May 27 on raising the public debt ceiling, preventing the US from defaulting next June.

The US Senate has just approved a bill on the public debt ceiling, just one day after the House of Representatives made a similar move, helping the country avoid the risk of default this week.

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