They call the scenario the “economic apocalypse.” And it consists of the United States, for the first time in its history, incurring in the so-called “default”, or breaches of its financial obligations, if Congress and the Joe Biden administration fail to reach an agreement soon to raise the debt ceiling.
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Although experts are debating when at that precise moment, Treasury Secretary Yanet Yellen He has said on several occasions that it could be this June 1st.
In other words, as of this Thursday -more or less- the US would not be able to pay all the financial obligations it has with its creditors and will also have to suspend wages to some of its federal employees and some of the most basic services it provides to its citizens.
Something catastrophic, according to economists, not only for the finances of the US but of the world, because the default would cause a domino effect that will travel to the four corners of the planet.
“It would be disastrous. First of all, of course, for the US and its credibility globally as a country would be that it lives up to its obligations. But given the interconnectedness of global markets this is something we will all pay for,” says Darrel. Duffle, a professor of business and enterprise at Stanford University.
The US and its global credibility as a country would be living up to its obligations. But given the interconnectedness of global markets this is something we will all pay for.
Although it is not the first time in this country that politicians flirt with this “economic Armageddon” – they were very close in 2011 – on this occasion, given the extreme polarization that exists between Republicans and Democrats, the possibility seems very real. .
The Republicans, who have controlled the House of Representatives since January, are demanding deep cuts in public spending as a precondition for raising the debt ceiling, which is now close to $32 trillion.
But Biden, so far, has rejected the moves for political and economic reasons.. According to risk rating agency Moody’s, the plan proposed by the Republicans would translate into unemployment and reduce economic growth at a time when the country is very close to entering a recession.
In addition, notes the White House, the expansion of the debt is necessary since it was the same Congress that in the past authorized the expenses that the government could not pay now. And although the Republicans insist that they are motivated by their interest in fiscal discipline, to Biden it seems a hypocritical argument since they themselves had no problem raising the ceiling when their predecessor, Donald Trump, was in the White House.
He knows, incidentally, that the planned cuts – mostly to social security and to combat climate change, among others – would leave him handcuffed for the rest of his term and without ammunition to seek re-election. Probably one of the goals in the current tug of war. And besides, he fears that giving in now will only open the door for them to use the same strategy to obtain further concessions later.
Both parties have spent weeks negotiating behind closed doors a solution to the impasse. This Friday the news circulated that the parties would be close to reaching an agreement.
Under it, the debt ceiling would be raised to cover government spending for two more years, but any increase in outlays for programs deemed non-essential would be frozen.
In other words, the only items that would receive increases would be those related to national security, such as military expenses and the payment of war veterans. All the rest, and that includes, education, housing, health and others would remain at current levels.
According to the sources, the parties have come closer in the last hours but there are discrepancies about the final amount of the increase in that ceiling.
But the underlying explanation is this. The United States spends more than it collects in taxes and therefore must borrow the surplus to finance its operations. Most of that debt is in the form of Treasury bonds, which are purchased by private individuals and governments around the world.
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Over the years it has been accumulating a debt that today reaches almost 32 trillion dollars. That debt has a maximum limit and, when it is met, Congress must pass a law that authorizes the extension of the so-called ceiling. The current limit is 31 trillion dollars, a figure that was reached in January of this year.
Since then, the Treasury has been using extraordinary measures and accounting maneuvers to continue covering its expenses. According to the government, and that is the date Yellen set, as of June 1, she will no longer be able to meet all her financial obligations if the ceiling is not raised.
If the US debt capacity has not increased by that date, the Treasury You will no longer be able to acquire more debt and, therefore, you will not be able to pay your bills on time or in full. Among them, paying the interest you owe on that same debt, payments to pensioners, federal employees, contractors, war veterans and many more.
This has never happened in the history of the country. Which is why other governments and investors around the world buy US Treasury bonds as they consider them a safe bet.
Since 1940, the US Congress has raised the debt ceiling more than 85 times. In general, once or twice a year in a procedure that is usually routine. But since the Republicans took control of the House in last year’s elections, things have gotten complicated.
Above all because in this new legislative majority there is a radical sector that seems willing to take the fight to the last consequences.
A sector that has a lot of weight because it is a minimum majority of only 5 votes and therefore theirs weigh. In other words, even if its leader Kevin McCarthy wanted to reach an agreement to raise this, he could sink in the House without this sector supporting him.
In addition, as is recalled, McCarthy achieved the presidency of the House after reaching an agreement with this group -which opposed his election- that allows them to call a vote to remove him at any time. Something that, of course, he is not interested in unleashing.
The President has said that he will not give in to what he clearly sees as blackmail, especially when the stability of the US economy is taken hostage.
Although no one knows for sure what the specific effect of default would be -because that bridge has never been crossed before- everyone agrees that it would be very serious.
A default has the potential to be catastrophic: the credit market would freeze, the price of the dollar would plummet, interest rates would skyrocket.
The only precedent that exists happened in that summer of 2011 when a similar fight was about to go into default. Although the crisis was resolved at the last moment, the mere possibility of default generated dire consequences, including the first reduction in the history of the US debt rating, until then Triple A, which was applied by the S&P rating agency.
Which had concrete effects because the US, from that moment on, had to pay more interest for the money it borrowed.
In addition, according to a Treasury Department report at the time, the impasse caused a 17 percent drop in the stock market that led to the loss of $2.4 billion in American investments. This despite the fact that a last-minute agreement was reached. But an effective default would be much more serious.
In addition, the other risk rating agencies such as Flinch and Moody’s, which did not reduce the rating in 2011, would be considering doing so now since the crisis demonstrates political instability in the US as a result of intense partisan disputes that have worsened.
“A default has the potential to be catastrophic: the credit market would freeze, the price of the dollar would plummet, interest rates would skyrocket, its effects would go around the world, and a financial crisis and recession similar to the one that was experienced in 2008 or worseW, said the Treasury in that report as a warning and to avoid similar scenarios in the future.
Scenarios that, unfortunately, are close to materializing.
SERGIO GOMEZ MASERI
EL TIEMPO correspondent
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