(Washington) The ceiling of the indebtedness of the United States, which was reached Thursday and obliges the American ministry of Finance to take measures of economy to ensure the payment of its financial commitments, became object of confrontation between the Democratic administration and the new Republican majority in the House of Representatives.
In a letter sent Thursday to Republican Speaker of the House of Representatives Kevin McCarthy, Treasury Secretary Janet Yellen announced the implementation of “exceptional measures” while the maximum debt ceiling, currently set at more than 31,000 billion dollars, was reached before it was amended by Congress.
The first measures concern the cessation of payments to several pension funds and health or disability benefits for public officials, technical adjustments “which are not immediately necessary for the payment of pensions”.
At the same time, “a period of suspension of debt issuance” has begun and will last until June 5, added Mr.me Yelen.
These measures allow the US administration to see ahead, but can only be temporary and, if Congress fails to reach an agreement, the United States could eventually find itself in a situation of default.
“Failure to meet government obligations would cause irreparable damage to the American economy and the livelihoods of all Americans as well as to global finance,” insisted Janet Yellen on January 13.
For the time being, the markets have reacted little to the announcement, the indices – already trending lower at the opening – losing 0.69% for the Dow Jones and 1.17% for the NASDAQ respectively at 11 a.m. ( Eastern time).
The 10-year Treasury bills, the reference value, stretched a little to 3.40% against 3.36% the day before.
“Everyone expects that to be over by summer, but for now it’s not going to really move the markets,” said Ed Moya, analyst for Oanda.
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The White House had underlined Friday that, in normal times, the elected Republicans and Democrats cooperate in the matter “and that is what is necessary”, excluding however any negotiation on this subject.
A way of placing the responsibility for a possible failure on the Republicans, because the latter have made no secret of their desire to use the question of the ceiling as a bargaining chip to obtain blows of plane on the plans of funding voted during the first half of President Joe Biden’s term.
But, even more, they want to impose their own economic program, which provides for new tax cuts and a reduction in public spending.
“Imagine giving your child a credit card that regularly hits the cap, so you increase it and so on. At some point do you continue like this or are you trying to change his behavior? “, thus described Mr. McCarthy in front of the press.
On the Democratic side, elected Pennsylvania member Brendan Boyle, a member of the House Budget Committee, said Friday that the Republicans were creating “a crisis that has no reason to exist”. “For the sake of our economy and American livelihoods, their political gamesmanship must stop,” Boyle added.
“Sacrosanct” solvency
JPMorgan Chase chief executive Jamie Dimon told CNBC on Friday that “the solvency of the US government should not be an issue. It is sacrosanct, it must never happen”.
If the increase, or the suspension, of the debt ceiling is a subject that comes up regularly, with already 79 interventions since 1960, it is occasionally a subject of political tension between the two parties.
In 2011, the opposition between the Republican majority in Congress and the Democratic administration of Barack Obama had been such that the rating agency Standard and Poor’s had lowered the long-term debt rating of the United States, a first that shook the financial markets.
Rebelote in 2021, this time between the very thin Democratic majority in Congress and the Republican opposition who scrapped for several months before reaching an agreement.
Janet Yellen announced in early August, in a letter to former Democratic Speaker of the House Nancy Pelosi, the implementation of “extraordinary measures” to deal with the situation.
New battleground between Republicans and Democrats
The United States reached the maximum debt limit set by Congress on Thursday, effectively prohibiting the government from borrowing more, even to meet its obligations on the debt market, a situation which could cause, if it persists, an American default.
What is this “debt ceiling”?
This is the maximum level set by Congress for borrowing by the US government. It is currently set at $31.281 billion, following already complicated negotiations in October 2021 between Democrats, who then had a narrow majority in both chambers, and Republicans. They were concluded in extremis before a previous crucial deadline.
The loans concerned are both long-term, including bonds issued by the Treasury, and short-term loans, which are often used by States to obtain working capital. And they make it possible to settle all the government’s bills, for example veterans’ pensions, social assistance or the reimbursement of previous installments that have expired.
Why is there a risk of blocking?
If the ceiling has already been raised 79 times since 1960, the subject sometimes becomes a subject of tension between the two major political parties.
Already in 2021, the negotiations had lasted several months after a warning letter sent by the Minister of the Economy Janet Yellen. In 2011, the risk had been such that the rating agency S&P had lowered the rating of the United States, causing strong shocks in the markets.
But this time, the subject comes to Congress at a time when the House of Representatives has just swung to the Republican side.
For them, the discussions on this ceiling are an opportunity to force the hand of the Democrats in order to force them to reconsider the major financing plans voted during the first half of Joe Biden’s mandate.
“Imagine giving your child a credit card that regularly hits the cap, so you increase it and so on. At some point, do you continue like this or do you seek to change his behavior? “, explained the new Republican Speaker of the House Kevin McCarthy.
On the Democratic side, the Republicans are accused of “deeming it normal to take our economy hostage to impose extremist and unpopular reforms”. In a letter addressed to Kevin McCarthy, Janet Yellen for her part recalled that raising or suspending the ceiling “does not mean authorizing new expenditure”.
On the other hand “the impossibility of meeting the obligations of the State would cause irreparable damage to the American economy and the livelihoods of all Americans as well as to global finance”, she warned.
The White House has said it does not intend to negotiate on the subject with the Republicans. “A sign of arrogance,” replied Kevin McCarthy.
Does reaching the ceiling mean American default?
Not immediately, but if the situation were to continue, it could happen.
At first, this mainly forces the government to reduce its spending. He must indeed prioritize the repayment of his obligations over any other expense in order to avoid default.
The first measures, which fell on Thursday, concern the financing of several pension funds for public service employees and consist immediately of simple transfers of credits between different lines of expenditure. The Treasury also suspends, until June 5, any new debt issuance.
If the situation persists, the Treasury will have to go further, with an effective reduction in a certain number of expenditures, in theory of the order of the deficit authorized by Congress for this year, in order to balance its budget.
This could notably lead to delays in the payment of pensions, in social security payments or military salaries or the closure of services – the famous “shutdown” –. With a certain impact on the American economy and which would not stop growing, as the State would have to cut its expenses.
But above all, failing an agreement, the United States could find itself in default, that is to say not be able to repay on the scheduled date maturities linked to its debt, which would constitute a first in the world. country’s history.
Congress had finally agreed on raising the ceiling in December, shortly after midnight on the same day that the Treasury would have been forced to take additional measures, with a more direct impact on the American economy.