President Joe Biden is back in the country for crucial meetings with Republican leaders to prevent a historic debt default. Speaker of the House Kevin McCarthy and other prominent Republicans have urged spending cuts to bring down the country’s ballooning debt. The United States would “highly likely” default on its debt as early as June 1, Treasury Secretary Janet Yellen warned, unless Congress acts to raise or extend the debt ceiling.
Moody’s, a credit rating firm, said that a one-week default could still cause a 0.7 percentage point drop in U.S. GDP and the loss of 1.5 million jobs. The “blow to the economy would be cataclysmic,” its economists say if it lasts for weeks or months.
Rating agencies around the world may soon downgrade otherwise risk-free Treasury securities. Research assistant at the Center for a New American Security Emily Jin has stated that the U.S. debt ceiling indicates short-term economic stability for the United States. The economy would suffer immediately if the U.S. defaulted on its debt, but it may worsen in the long run if the debt ceiling is repeatedly raised without steps to promote long-term economic growth.
Currently, $7.57 trillion, or 31% of the total $24.3 trillion U.S. Treasury market, is held by foreign governments and private investors.
In the event of a default in which the United States cannot pay some or all of its outstanding debt, investment risk would increase, leading to higher interest rates and a depreciation of the United States dollar.
U.S. Treasuries form the foundation of financial markets and the global financial system; therefore, a default would undoubtedly cause widespread upheaval.
The US government is dangerously close to a shutdown, which might damage the dollar’s status as a global reserve currency. Observers of China believe recent developments will strengthen Beijing’s resolve to wean itself off the dollar.
China’s top officials have wanted to make the yuan more widely used for years, but progress has been gradual. China’s leader Xi Jinping announced in December that the yuan would soon be used to pay for oil and gas imports from the Middle East. One Brazilian bank joined the yuan-dominated CIPS cross-border payment system in March, making it the first Latin American institution to do so.
A weak yuan, Western talk of “de-risking” investment from China, and rising U.S. interest rates, have all contributed to an increase in dollar deposits at Chinese commercial banks, according to an analysis of China’s central bank statistics published by Reuters in March.