US Debt Ceiling: What is it, why does it matter to the world, and what’s next?

First modification: 05/29/2023 – 20:13Last modification: 05/29/2023 – 20:19

The preliminary agreement between the White House and Republican leaders on the suspension of the debt ceiling in the United States took weeks of negotiations. However, it is just the beginning of a more thorny discussion: the legislative one.

The United States is fast and dangerously approaching a June 5 deadline, when it could commit a default that many have called “catastrophic,” not just for the country’s economy, but for the rest of the world.

That day, according to the Treasury Department, the nation’s treasury would run out of funds to finance its obligations. Unless Congress passes the bill, the draft of which is already being circulated among members of both parties.

But what is the debt ceiling and why is it so important to the world economy?

Suspension of payments, the main fear in the corridors of the Capitol

America’s fiscal year begins every October 1, and to finance its budget, Washington regularly sets a limit on federal borrowing, which today equals roughly 120% of the country’s annual economic output.

That ceiling was exceeded in January, less than four months since the start of the fiscal year. The Treasury Department has kept obligations just within the limit with extraordinary measures while continuing to borrow from investors.

But the Treasury warned that those measures could no longer be enough as of June 5. Because the Treasury borrows about 20 cents for every dollar it spends, at which point Washington would start defaulting on lenders, citizens, or both.

Eliminating the debt ceiling would allow the government to pay for expenses that Congress has previously authorized. But his critics argue that excessive spending is being given free rein that is increasing a deficit that has been growing.

There is already a preliminary agreement… what’s next?

This catastrophic scenario could be forgotten if Congress approves the agreement reached over the weekend by Democratic President Joe Biden and the main Republican in Congress Kevin McCarthy, to suspend the debt ceiling, which today stands at 31.4 trillion dollars. Dollars.

The legislature has one week to approve the bill. First, in the House, which Republicans control by a narrow 222-213 majority. There a simple majority (at least 218 votes if all members are present) will be needed for approval.

Debate and approval in the lower house could take a day or two and it is expected that it will take longer in the senate. In the Upper House, Democrats lead 51-49 and Vice President Kamala Harris casts the tiebreaking vote if the vote remains 50-50.

The road is not completely clear, if one takes into account that some extreme right-wing Republicans or some liberal Democrats who are unhappy with what their respective leaders negotiated, could vote negatively. But a legislative failure is the most tragic and least desired scenario.

Why do decisions in Washington affect the rest of the world?

A shock to the world’s largest economy would reverberate through global financial markets, as the value of US bonds came into question. These assets are among the safest investments and serve as a reference for the global financial system.

Additionally, according to experts, it is almost certain that the US economy will fall into a recession if the government stops paying items as important as soldiers’ salaries or Social Security benefits for senior citizens.

In the worst case scenario, economists expect millions of Americans to lose their jobs and ratings agencies could downgrade the US credit rating, as was the case in 2011.

C.on Reuters and AP