Default will have serious repercussions on US and global markets, experts warn
A poster at a bus shelter shows the national debt in Washington on Sunday. (PHOTO / AFP)
WASHINGTON — The United States is "highly likely" to default on government obligations by early June, said US Treasury Secretary Janet Yellen on Monday as experts warned of severe consequences resulting from the debt ceiling drama.
As soon as June 1, Yellen said in a letter to Congress, "it is highly likely" the government will be unable to pay all the nation's bills. She gave a similar estimate in another letter one week ago.
A debt default would be a cataclysmic event, with an unpredictable but probably dramatic fallout on US and global financial markets.
Eswar Prasad, professor of trade policy at Cornell University and senior fellow at the Brookings Institution
US President Joe Biden and House Speaker Kevin McCarthy both said they had a productive debt ceiling discussion late on Monday at the White House, but there was no agreement as negotiators strained to raise the nation's borrowing limit in time to avert a potentially chaotic federal default.
Basic differences still remain after the meeting.
The two sides are at odds over how to trim annual budget deficits. Republicans are determined to cut spending while Biden's team offered to hold spending levels flat. Biden wants to increase some taxes on the wealthiest people and some big companies, but McCarthy said early it is out of the question.
"The time of spending, just spending more money in America and government is wrong," McCarthy said after the Oval Office meeting.
In a brief post-meeting statement, Biden called the session productive but merely added that he, McCarthy and their lead negotiators "will continue to discuss the path forward".
Representative Patrick McHenry, a top Republican negotiator, on Monday night criticized the White House for lacking urgency in dealing with the US debt ceiling crisis.
The US hit its $31.4 trillion debt limit in January and the Department of Treasury employed accounting maneuvers known as "extraordinary measures" to keep the government paying its bills so far.
Because the dollar's dominance has made it the de facto global currency since World War II, it's relatively easy for the US to borrow and finance an ever-growing pile of government debt. However, a failure to lift the debt ceiling would trigger a default, likely sparking chaos in financial markets and a spike in interest rates, observers say.
"No corner of the global economy will be spared" if the US government defaults and the crisis isn't resolved quickly, said Mark Zandi, chief economist at Moody's Analytics.
Zandi and two colleagues at Moody's have concluded that even if the debt limit were breached for no more than a week, the US economy would weaken so much, so fast, as to wipe out roughly 1.5 million jobs.
"A debt default would be a cataclysmic event, with an unpredictable but probably dramatic fallout on US and global financial markets," said Eswar Prasad, professor of trade policy at Cornell University and senior fellow at the Brookings Institution.
The threat has emerged just as the world economy is contending with a panoply of threats, The Associated Press commented. On top of all that, many countries have grown skeptical of the US' outsized role in global finance.
"If the trustworthiness of (Treasurys) would become impaired for any reason, it would send shock waves through the system … and have immense consequences for global growth," said Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund.
The debt ceiling drama is sure to heighten questions about the enormous financial power of the United States and the dollar, Obstfeld said. "The global economy is in a pretty fragile place right now. So throwing into that mix a crisis over the creditworthiness of US obligations is incredibly irresponsible."