Like the Russian invasion of Ukraine, a US tech default would have global consequences. According to the British newspaper “Financial Times”. The global financial markets will be in chaosThe dollar’s credibility as the world’s reserve currency will suffer and confidence in America will decline. More than half of the world’s central bank reserves are held in dollars.
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The United States faces technical bankruptcy
The debt ceiling is the maximum amount the federal government can owe under US law Borrowing can be done by issuing debt securities The New York Times explains. This time the ceiling was reached on January 19, prof Treasury Department launched emergency measures, that is, accounting solutions that allow more debt servicing. But those opportunities will run out in June.
Accordingly, said US Treasury Secretary Janet Yellen He wrote a letter to Congress requesting that the full confidence in American credit be protected and that appropriate steps be taken to raise the American debt limit. She warned that the delay threatened “catastrophe” and “irreparable damage” to the economy and the material condition of Americans. The US debt is now worth $31 trillion and makes up approximately 96.19% of the debt. gross domestic product.
The deadlock usually recurs in debt ceiling talks when the party opposing the president has a majority in either chamber of Congress. Hence, reaching an agreement is part political theatre, part extortion and bargaining, resulting in concessions and budget cuts, but usually results in consensus and raising the federal government’s statutory debt ceiling.
What will Congress do?
But the dispute this time is more serious than usual, as President Joe Biden must reach an agreement with the Republican leader in the House of Representatives, Kevin McCarthy, whose position is weak and depends on the votes of far-right congressmen from the Arab Republic of Egypt. Circle the so-called horns. Politico warned that they may not allow McCarthy to make concessions, demand cuts in government spending, and, in fact, there may be official government default. The Wall Street Journal estimates that the distribution of power in Congress makes the risk of a state’s technical bankruptcy the highest since 2011.
JPMorgan’s chief economist said that given the particularly contentious position in the legislature, an agreement that would save the world’s largest economy from being unable to service its debt may be difficult to achieve this time around.
Goldman Sachs also warned in a note to the bank’s clients not to agree on a timely increase in the US debt ceiling. It will lower the rating again. The countermeasures that the government has to resort to – such as selective spending – will automatically destroy a tenth of economic activity in the United States. Think Tank Third Way calculated in December that this would eliminate up to 3 million jobs.
The health of the global economy and the global financial system depends on the level of confidence. Yellen warned that if confidence in the world’s most powerful country’s solvency declines, it will shake the financial system and could lead to a recession.
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