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“No one would be spared,” Maya MacGuineas, chair of the Committee for a Responsible Federal Budget, told CNN. “It would be such a self-imposed disaster that we would not recover from, all at a time when our role in the world is already being questioned.”
If the Treasury defaults and the stalemate continues, the federal government would have to make “devastating” spending cuts that would create a “cataclysmic” situation for the economy, Moody’s Analytics warned this week.
Moody’s estimates that nearly 6 million jobs would be lost, the unemployment rate would drop to almost 9% and stock prices would fall by a third, wiping out about $ 15 trillion in household wealth.
Failure to raise the debt ceiling on time could stop the payments millions of Americans rely on, including federal workers’ paychecks, Medicare benefits, military salaries, government reimbursements. taxes, social security checks and payments to federal contractors.
A memo released by the White House last week to state and local authorities listed several key programs that would be halted if Congress did not increase the debt limit, including disaster relief efforts, Medicaid and the children’s health insurance program, financing of infrastructure, education, public health and children’s nutrition.
“If the United States defaults and can no longer pay its obligations, billions of dollars in state aid and state-run but federally funded programs could be halted,” the White House warned. .
The ensuing market collapse would cause the retirement savings of countless families to collapse and increase the cost of mortgages, auto loans, and businesses of all sizes.
All of this would threaten to bypass Covid’s incomplete economic comeback, triggering a new recession that would require even more federal borrowing to recover.
Faith in US debt – the backbone of the global financial system – would be tarnished, perhaps irreversibly.
In short, it would be an epic disaster for ordinary Americans – and caused by extreme political dysfunction.
The clock is turning. The Treasury estimates it will run out of cash and accounting gimmicks at some point next month unless Congress raises the debt ceiling.
Once the federal borrowing limit is reached, Washington would be unable to issue new debt. It is untenable because America does not generate enough income to pay its expenses. He needs to borrow to keep the lights on.
Leaders of a key Treasury advisory group on Tuesday expressed deep concern over the impact on the market. If there is a prolonged struggle for the debt ceiling, “the Treasury market is likely to experience significant disruption that could trigger wider tensions in the market,” the leaders of the Treasury Borrowing Advisory Committee wrote in a letter addressed to Secretary of the Treasury Janet Yellen.
This stress means that it could be difficult to buy or sell Treasuries, a crucial corner of finance known as the repo market could be under stress, investors could withdraw funds from the market. monetary and trading companies could withdraw from market making activity.
“As we saw in March 2020, stress in the Treasury market can cascade, self-reinforce and spill over into all financial markets, tightening financial conditions and possibly damaging an economic recovery. still fragile, ”wrote the letter’s authors.
That’s why many on Wall Street and Washington expect Congress to end up doing the right thing. This has happened in the past and it is safe to assume that it will happen again. If Congress raises the debt ceiling before the government runs out of cash, the impact on markets and the economy should be minimal.
Goldman Sachs recently warned clients that this was “the riskiest debt limit deadline in a decade,” since the 2011 showdown that rocked financial markets and triggered downgrade without US debt precedent.
If Congress fails to lift the debt limit on time, many believe the federal government would try to keep paying bondholders – but for the first time in history, it would stop payments on debt. other commitments such as contractors or other beneficiaries.
This scenario is known as “technical default”, in which the government continues to pay bondholders but suspends payments to others for a period of time. Still, there is debate over whether the Treasury Department has the legal authority to prioritize payments.
Nonetheless, Eurasia Group estimates that there is an “unusually high” 20% probability of a technical fault, which the advisory group believes would be a “market nightmare”.
“Ignoring these risks is a mistake,” the consulting firm wrote in a report.
Goldman Sachs strategists have said it “seems likely” that the Treasury will continue to repurchase maturing Treasury securities and make coupon payments. However, the Bank of Wall Street said the government should suspend more than 40% of expected payments, “including some payments to households.”
It is not clear whether a technical default, rather than a full-fledged default, would ease the economic and financial pain.
David Kelly, chief global strategist at JPMorgan Asset Management, said that a technical default would be “almost as disastrous for the economy”, but in the long run it could limit the damage to the credit rating of the company. ‘America.
“However, a terrible goal anyway,” Kelly said.
Mark Zandi, chief economist at Moody’s Analytics, sees no distinction between a default and a technical default.
“If the Treasury misses a payment for whatever, whether it’s a Treasury bill or the electric bill, it would be a default, and global investors would be rushing for the door,” he said. Zandi said in an email.
Likewise, rating agencies that assess the creditworthiness of the United States may not see a difference.
Charles Seville, senior U.S. analyst for Fitch Ratings, told CNN in an email he continues to expect the debt limit to be raised before it’s too late. . Yet he also said: “Incurring arrears on other government bonds in order to pay bondholders is not something we would expect to see in an AAA rated sovereign state.”
In other words, Fitch (and other rating agencies) could downgrade America even if it continued to pay bondholders.
This would increase the cost of borrowing for the federal government, forcing Washington to devote more and more resources to paying interest on the existing mountain of debt.
Tax hikes and spending cuts would likely be needed to make up the difference – and there would be much less room to invest in major needs like education, science, childcare and the climate crisis.
The closer Congress gets to the deadline, the greater the risk of a miscalculation that results in a default that neither party wants. In this chicken game, the livelihoods of millions of people are at stake.
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