Finally, a tentative debt ceiling deal has been reached between the White House and House Republicans. Although a deal has been reached, it still needs to be approved by Congress and signed by President Joe Biden before the US defaults or fails to make a payment as planned.
The likelihood that the United States will approach the crucial point at which it can no longer satisfy its financial obligations progressively increases with each day that goes without a measure to raise the debt ceiling.
The government may face unprecedented difficulty if legislators fail to approve the tentative accord and fail to extend the nation’s debt ceiling by early June: deciding which obligations to pay first while the Treasury Department struggles with insufficient finances.
Debt versus other payments
The Treasury may have to choose between paying its non-debt obligations, such as Social Security, veterans’ benefits, unemployment insurance, and food stamps, and maintaining government agencies like the US Centers for Disease Control, if the United States doesn’t raise the debt ceiling in time.
The US government pays out millions of dollars every day, but the head economist at Moody’s Analytics Mark Zandi asserts that the cost to the economy as a whole would be much higher if the US government were to default on its debt. The credit rating company, Moody’s Investor Service, is distinct from Moody’s Analytics.
The federal government’s capacity to pay all of its obligations on time would be questioned if the United States had a debt default; this would have an impact on the government’s credit rating and cause severe turmoil in the financial markets.
The cost of interest is higher for nations with poor credit ratings than for those with better credit ratings. Borrowers are rated by the three biggest credit rating companies, Moody’s Investor Service, S&P Global Ratings, and Fitch Ratings, according to their perceived capacity to repay loans.
Millions of Americans may find it more expensive to borrow money if America’s credit rating were reduced, which would result in increased mortgage, personal loan, and credit card rates. It might raise borrowing prices for businesses, cause layoffs, and ultimately trigger a recession.
CNN confirms the news on their official Twitter account:
If lawmakers don’t pass the debt ceiling deal and raise the country’s debt limit by early June, the government may confront an unprecedented challengehttps://t.co/trrXUcXBtg
— CNN (@CNN) May 28, 2023
What is given top priority?
Treasury will probably exert all reasonable efforts to prevent a debt default in the absence of legislation approved by Congress and signed by Biden.
Government payments like Social Security and federal employee wages are not considered debt instruments, therefore they are less likely to be taken into account when rating the US debt.
Zandi admitted that it would probably not be politically popular for the government to choose bondholders, especially foreign governments like China and Japan, over an elderly Social Security beneficiary. He does, however, think that the government will do everything in its power to avoid a default on its debt.
The economy will collapse, budget deficits will soar, and our interest costs will increase as a result of investors’ increased desire for higher rates, according to reality, said Zandi.
“The likelihood of a grandma receiving a Social Security cheque in ten to twenty years has significantly decreased. We won’t have as much of one, at least, because our financial situation will be much more insecure.
However, Janet Yellen, the Treasury Secretary, has not stated what the Treasury Department would do if the nation reaches the X-date when the government is no longer able to fulfill all of its obligations. Prioritizing payments was described by her in March as “effectively a default by just another name.”
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Treasury won’t be able to satisfy everyone
Yellen revised her estimate of the X-date on Friday, moving it to June 5.
Putting debt repayment first may prevent an even larger economic catastrophe, but the US may not come out unscathed.
Tim Geithner, who was the Treasury Secretary at the time, compared the government’s selective payment of bills in 2011 to a homeowner who pays their mortgage but puts off paying their credit card and car loan bills: even though this important housing expense is covered, the homeowner is likely to still have damaged credit.
No matter which payments Treasury chooses to make first, according to Betsey Stevenson, a professor of economics and public policy at the University of Michigan, the organization will probably face legal action from individuals who are left behind.
How should Treasury proceed? Should it issue additional debt that it is not permitted to issue? Should it refuse to pay a bill that is due? Should it refuse to pay the US government’s issued debt? There isn’t a certain legal solution, she remarked.
“Treasury really doesn’t want to answer that question, and they really don’t want to be in that position.”
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