Negotiations between Democrats and Republicans over the US debt ceiling have been progressing with difficulty in recent days. Without an agreement by the end of the month, the United States could find itself blocked on June 1, with repercussions on the world economy.
By shortening his Asia-Pacific tour, Joe Biden is sending the signal of a crisis situation. While he was to go to Australia and Papua New Guinea in particular following the G7 summit in Hiroshima (Japan), the American president chose to return to Washington on Sunday May 21. In question : the threat of a default of payment by the United States, which has become the major subject of American domestic politics in recent days.
Democrats and Republicans cannot agree on raising the US debt. If Congress does not decide by June 1 to raise it, the impasse presents a risk “catastrophic” And “devastating for America and, to put it bluntly, the whole world”, in the words of Joe Biden, in a video posted on Twitter on Wednesday. Franceinfo takes stock of this crisis in five questions.
What is a payment default?
When a State goes into “default of payment”, it is no longer able to pay its debts and can no longer borrow. The United States would therefore be unable to pay the salaries of its civil servants, to pay social benefits or to reimburse their creditors (investors, banks or institutions).
A country declares itself bankrupt when it announces that it can no longer honor its debt maturities. Formalization can also come from a rating agency. Interviewed in 2020 by The echoesthe French economist Gilbert Cette recalled, however, that a State cannot be put into liquidation as a company would be, because “a company can cease to exist, a state cannot. And that is the fundamental difference”.
Why is the threat hanging over the United States more than ever?
The country could be in default of payment from June 1, if no agreement is found in Congress to raise the debt ceiling (ie the maximum level of debt that the United States can reach). This ceiling was already reached last January. So far, the United States has avoided the worst thanks to accounting manoeuvres. Currently set at 31,000 billion dollars (29,000 billion euros), Congress must now decide on raising this ceiling.
Republicans, led by House Speaker Kevin McCarthy, are demanding drastic government budget cuts before giving the green light. They wish cut federal spending by $130 billion (to return to 2022 levels). A red line that the Democrats refuse to cross.
“It is time for the other side to abandon its extreme positions, because much of what it has already offered is unacceptable”, castigated Joe Biden on Sunday from Hiroshima. He said he would speak directly with Kevin McCarthy during his return flight on Sunday.
How would that cripple the US economy?
In the United States, the consequences are already visible. While the country did not go bankrupt, “federal government borrowing rates have tightened a bit”, comment to franceinfo Jacques Le Cacheux, professor of economics at the University of Pau and researcher at the French Observatory of Economic Conditions (OFCE). As noted by the American media NBC News, the borrowing costs of the American federal administration have already climbed to more than 5% in June.
If the country defaults, all interest rates, whether offered to the state, businesses or individuals, would rise significantly, according to Howard Gleckman, an American researcher interviewed by NBC News. What affect the daily lives of Americans who take out mortgages or consumer loans. “There will be immediate layoffs within the civil service,” adds to franceinfo Michel Santi, Franco-Swiss economist and former adviser to several central banks.
Another possible impact: Joe Biden’s government will have to prioritize future payments with the funds it still has. “US treasury officials will have to make arbitrary choices. Are we going to pay such welfare benefits to one audience rather than another?”anticipates Michel Santi.
For Jacques Le Cacheux, companies and investors will also be affected. “The first will pay more for their debt, if they are in debt, or will find it difficult to borrow. The second will make losses on their portfolios. This will cause the dollar to depreciate.”, explains the OFCE economist, according to the following mechanism: whoever says depreciation says inflation, and therefore an increase in the cost of living.
What could be the repercussions on the global economy?
Beyond the American borders, the depreciation of the dollar risks “to shake confidence in this currency, Judge Jacques Le Cacheux. US treasury bills are held by many investors around the world, as it was a safe investment until now”.
The “Treasury Bonds” are indeed the keystone of the entire global economic architecture. For Michel Santi, “they serve as a reference for many financial transactions in the world, whether they are loans or borrowings.” If they no longer have value, those who hold them will be “taken hostage”, illustrates the economist.
As a result, for countries like China or India, which have been trying for years to impose their currency to replace the dollar, “It would be a golden gift from the United States”, analyzes Michel Santi. Last major risk, according to him: “A Stoppage” in financial aid to Ukraine, if US treasury officials choose to freeze that budget.
Is the scenario of a payment default really likely?
For Jacques Le Cacheux, the entry into default of payment by the United States remains “fairly unlikely”. “We finds it hard to imagine that there won’t be a deal [entre républicains et démocrates]. IThe consequences can be colossal”believes this specialist. “JUntil now, the United States has never failed, the country is considered the safest in the world with Switzerland and Germany. But the situation is currently worrying, because very high-level American politicians have considered this possibility”tempers Michel Santi.
Proof that this threat is taken very seriously, Joe Biden on Sunday raised the possibility of using the constitutional weapon to avoid the default of the country. “I’m leaning on the 14th Amendment“, he announced. This article of the US Constitution states that “the validity of the public debt of the United States (…) should not be called into question”. What, theoretically, allow to circumvent the obligation to raise its ceiling. This interpretation, however, is highly controversial among jurists.