Why The World Faces U.S. Debt Threat
The Fitch Ratings has threatened to downgrade the U.S.’ AAA rating over the political standoff about raising the debt limit.
Fitch Ratings has threatened to downgrade the U.S.’ AAA rating over the political standoff about raising the debt limit.
The caution comes as talks between U.S. President Joe Biden and Kevin McCarthy, the House leader in the Republican-led Congress, have remained inconclusive after several rounds.
BQ Prime explains the U.S. debt saga.
Why Is The Debt Limit Important?
The debt limit caps what the U.S. can borrow against bonds. Basically, the entire spending of the U.S. Federal Government depends on it.
The U.S. has the highest debt in the world in absolute terms. Not raising the limit runs the risk of default.
The existing ceiling stands at $31.4 trillion, while the current U.S. debt is about $30.1 trillion.
What Needs To Be Done?
Congress must pass legislation to raise the limit. According to Treasury Secretary Janet Yellen, it has to be done quickly as the U.S. runs the risk of defaulting as early as June.
What’s The Problem?
Biden’s talks with McCarthy have been inconclusive, and the two sides are yet to find common ground. The problem stems from the Republicans wanting to defund or reduce funding for some of the key projects and policies of the Biden administration, including strict conditions for social security payouts, abandoning student loan waivers, and reducing funding to the IRS.
Is This The First Time The U.S. Faces This Risk?
No. In 2011, it had a similar brush with default. At the time, S&P had downgraded U.S.’ AAA rating, causing global market volatility.
Has U.S. Ever Defaulted On Debt?
No. The U.S. Congress has raised the debt limit 78 times since 1960, most recently in 2021. But then the Democrats had a majority in both houses.
What Happens If The Debt Limit Is Not Raised?
The first risk is that the U.S. will default on its debt. That can happen as early as June, according to Yellen. The federal government will run out of cash.
That will cause the global markets to collapse; they are jittery already. And U.S. trade will suffer, sending ripples through the world's factories.
The world's No. 1 economy will crash into a recession, and the global economy won't be spared either. Everyone holding U.S. assets will suffer steep losses.