Fact: The US debt hit the ceiling already in January
Formally, the US hit the debt ceiling – of 31,400 billion dollars – already in January. But the Ministry of Finance has since been able to pay for itself by shuffling around existing resources. However, Finance Minister Janet Yellen has warned that at the beginning of June it will no longer be possible to handle the payments in this way.
The consequences would be dramatic and force drastic political measures. Most expect the US to go to great lengths to keep up with its interest payments and repayments – to avoid a global financial market catastrophe.
The austerity that would be necessary without new loans would therefore hit retirees and other beneficiaries within the US social security system very hard and also mean suspended payments to suppliers and ongoing operations – including defense. This scenario would create a deep recession in the world’s largest economy, according to SEB’s economists.
Sources: Bloomberg, SEB, The Wall Street Journal.
The protracted negotiations between the Republicans and the Democrats are ongoing at the US Congress.
— A negotiation is underway. I am hopeful that we will know tonight if we reach a settlement, Joe Biden told reporters at the White House on Friday evening local time.
Biden’s comments come after Finance Minister Janet Yellen on Friday chose to extend the deadline to June 5. If no agreement is reached before the date, the US government risks suspending its payments, which many warn could trigger another financial crisis.
The extension from the previous June 1 date came after Yellen and the Treasury Department reviewed the latest economic estimates of when the Treasury Department does not have enough resources to meet the government’s bills.
Yellen warned at the same time that “difficult hardships lie ahead” if Congress does not reach a solution.