Debt default: US risks defaulting its debts, which would set of dire consequences if Congress doesn’t act

Washington-The dispute over raising the country’s borrowing limits emphasizes reality as the Democratic Party is in the midst of the highest moments of President Joe Biden’s drastic legislative agenda. Pushing potential defaults into the mix can have catastrophic consequences.

A mild recession is likely to be the best scenario for the U.S. government to default, analysts say, the country is expected to reach next month, and Congress must act to increase. Must be. The worst-case scenarios are the downstream impact of potentially chained unemployment, the tens of billions of dollars shutdown of Covid-19 economic recovery aid, the near freeze on the credit market, and the visible impact of GDP. includes. It can last for multiple quarters.

“Everyone will not be spared,” Maya McGuineas, chairman of the responsible federal budget committee, told CNN. “When our role in the world is already questioned, it will be a voluntary disaster that we cannot recover.”

Moody’s Analytics said this week that the federal government would have to implement “catastrophic” spending cuts as the Treasury defaults and prolongs the impasse, causing a “catastrophe” situation in the economy. I warned.

Moody’s estimates that nearly 6 million jobs will be lost, unemployment will skyrocket to nearly 9%, stocks will plummet to one-third, and household wealth of about $ 15 trillion will be wiped out.

Failure to raise debt caps on time depends on millions of Americans, including federal worker salaries, Medicare benefits, military salaries, tax refunds, social security checks, and federal contractor payments. Payment may stop.

Republicans are categorically opposed to offering votes to raise debt caps, despite plea from officials and observers for the disastrous consequences of neglecting or delaying such actions. ..

Former Treasury Secretaries Steven Mnuchin and Hank Paulson have said in the past few weeks amid growing financial market concerns about possible US defaults, according to three people familiar with the first reported debate. According to the Washington Post, he spoke to Senate minority leader Mitch McConnell about debt caps. After receiving it, the message given to the Biden administration’s contacts was that McConnell had not planned to move from his position that Democrats had to raise their debt limits themselves.

“Basically, he’s not bluffing,” how one explained the impression left to the former Chief Financial Officer for the last two Republican administrations.

A memo circulated by the White House to state and local authorities last week states that Congress could not raise its debt limits, including disaster relief efforts, Medicaid and Children’s Health Insurance programs, infrastructure funding, education, and the public. There were some major programs listed in. Health and nutrition of children.

“If the United States defaults and is unable to pay its obligations, state aid and state-owned but federal-funded programs could suspend billions of dollars, the White House said. There is. “

Subsequent market collapses will disrupt the retirement savings of countless families and boost the cost of mortgages, car loans and borrowing for businesses of all sizes.

All of this will ignite a new recession that could short-circuit an incomplete economic return from Covid and require more federal borrowing to recover.

Confidence in US debt, the cornerstone of the global financial system, will probably be irreversibly undermined.

In short, it’s a catastrophic disaster for everyday Americans, caused by extreme political dysfunction.

“Failure to raise debt limits will have catastrophic economic consequences,” the Treasury warned on its website, and Congress has been trying to raise, extend or revise the definition of debt limits 78 times in the past. He added that he acted. The Treasury states that 49 Republicans at the time were in the White House.

The clock is ticking. The Treasury predicts that at some point next month there will be no cash and accounting gimmicks unless Congress raises the debt cap.

When the federal borrowing limit is reached, Washington will not be able to issue new debt. It’s unacceptable because the United States doesn’t bring enough income to pay for that spending. You need to borrow to keep the light on.

Leaders of key financial advisory boards expressed deep concern about the impact on the market on Tuesday. In the event of a prolonged dispute over debt restrictions, “the Treasury market is likely to experience significant turmoil that can cause broader market stress,” finance in a letter to Treasury Secretary Janet Yellen. The leader of the Provincial Borrowing Advisory Board wrote.

The stress means that buying and selling of the Ministry of Finance, an important corner of finance known as the repo market, can be difficult, investors withdraw from money market funds and trading companies from market-making activities. There is a possibility of withdrawal.

“As we saw in March 2020, Treasury market stress unfolds in a chained, self-reinforcing manner, echoing across financial markets, tightening fiscal conditions and damaging the still fragile economic recovery. May give, “the author of the letter wrote.

That’s why many on Wall Street and Washington eventually expect Congress to do the right thing. It has happened in the past and it is reasonable to assume that it will happen again. If Congress raises its debt cap before the government runs out of cash, the impact on the market and economy should be minimal.

On Tuesday, the House of Representatives passed a law suspending debt restrictions until December 2022, but that particular measure is not expected to pass the Senate.

Goldman Sachs recently warned clients that this is “the riskiest debt limit of 10 years.” This is the first time since the 2011 showdown that rocked financial markets and caused an unprecedented downgrade of US debt.

For the first time in history, contractors and other receipts, although many believe that the federal government will continue to pay bondholders if Congress fails to raise its debt limits on time. Stop paying other promises like to a person.

This scenario, known as the “technical default,” is where the government continues to pay bondholders, but suspends payments to others for a period of time. However, there is some debate as to whether the Treasury has the legal authority to prioritize payments.

Nonetheless, the Eurasia Group estimates that there is a 20% chance of “abnormally high” technical defaults, and the consulting group warns that this is a “market nightmare.”

“It’s a mistake to dismiss these risks,” the consulting firm wrote in a report.

Goldman Sachs strategist said the Treasury is “likely” to redeem Treasury bills that continue to mature and pay coupons. However, Wall Street banks said the government needed to suspend more than 40% of expected payments “including some payments to households.”

It is not clear whether technical defaults, rather than full-fledged defaults, will ease financial and financial distress.

David Kelly, chief global strategist at JPMorgan Asset Management, said technical defaults “would be almost disastrous for the economy,” but could limit damage to US credit ratings in the long run. ..

“But it’s a terrible goal anyway,” Kelly said.

Mark Zandi, Chief Economist at Moody’s Analytics, believes there is no distinction between defaults and technical defaults.

“If the Treasury misses a payment, whether it’s a government bond or an electricity bill, it’s the default and investors around the world will rush to the door,” Zandy said in an email.

Similarly, credit rating agencies that value American creditworthiness may not make a difference.

Charles Seville, US chief analyst at Fitch Ratings, told CNN in an email that he continues to expect debt limits to be raised before it’s too late. Still, he said, “delinquency of other government obligations to pay bondholders is not expected to be seen in AAA-rated sovereigns.”

In other words, Fitch (and other rating agencies) could downgrade the United States, even if it continues to pay bondholders.

It raises federal borrowing costs and forces Washington to spend more and more resources on paying interest on existing debt piles.

Tax increases and spending cuts may be needed to make up for the differences, leaving much less room to invest in key needs such as education, science, childcare and the climate crisis.

The closer Congress is to the deadline, the greater the risk of miscalculations and the more unwanted defaults on either side. Millions of livelihoods are at a loss in this chicken game.

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Debt default: US risks defaulting its debts, which would set of dire consequences if Congress doesn’t act Source link Debt default: US risks defaulting its debts, which would set of dire consequences if Congress doesn’t act

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