Heading for a major economic crisis? 5 minutes to understand US default risk

“America has never defaulted on its debts. And this will never happen. Joe Biden was firm and confident on his return from the G7. However, the situation is more than urgent. The US may be in default as early as June 1 this year. A situation that could plunge the country, and possibly the world economy, into a major crisis. Explanations.

What is the country default payment?

Default on payments is determined by the inability of the country to pay its debts and, therefore, to take out a loan. In this situation, the United States could neither pay pensions or salaries (to civil servants, veterans, etc.), nor pay off its creditors, nor take over their accounts. The country also failed to reimburse holders of US Treasury bonds, one of the key investments in global finance.

A default would be “catastrophic” and “devastating for America and, roughly speaking, the whole world,” Joe Biden said, assuring that eight million jobs could be destroyed within its borders. All other countries with economic ties to the US could also be affected. For example, the default of Greece in 2015 dragged the European economy into a serious crisis.

Why might the United States be to blame?

Like many countries, the United States takes out loans to make up for its budget deficit. But this is an American feature, it is the prerogative of Congress to vote to increase the maximum amount of public debt that the largest economy in the world is allowed to accumulate. However, the famous $31 billion debt ceiling was exceeded earlier in the year. And what was originally just a formality – Congress raised the national debt ceiling 78 times in history – has now become the stake of a real political battle.

Republicans, led by Donald Trump, who called for a “default,” are refusing to raise that ceiling unconditionally, demanding drastic budget cuts before giving the green light. Democrats refuse. And each camp accuses the other of being responsible for this situation. Result: only a few days left for approval. According to Treasury Secretary Janet Yellen, a default could occur as early as June 1.

What are the solutions to avoid the crisis?

Negotiations between Democrats and Republicans may still lead to Congress. In that sense, Joe Biden is scheduled to meet this Monday with Republican House of Representatives leader Kevin McCarthy. The two men spoke to each other on Sunday. Kevin McCarthy spoke of a “productive” discussion, according to US media, indicating that teams from both sides have resumed discussions in progress.

Republicans are holding their own for now, calling for drastic cuts in federal spending. The Biden administration, for its part, prefers to cut some other spending, but above all to increase taxes on the wealthiest and companies.

“Washington cannot continue to spend money we don’t have,” wrote Kevin McCarthy. Joe Biden responded through the media that he would back out of an agreement “that protects billions (dollars) of subsidies for major oil companies, putting the health care of 21 million Americans at risk. Or who is defending the rich tax evaders, jeopardizing food aid for a million Americans.”

Joe Biden has another final card: the 14th Amendment to the US Constitution. This confirms that “the soundness of the public debt of the United States (…) must not be called into question” and therefore allows it to pretend that the debt ceiling does not exist and bypass a congressional vote. Joe Biehn said he was “looking into it,” accusing Republicans of “unacceptable proposals.” A sort of American style 49.3.