"X-Date" is approaching, can the United States weather the storm?
Beijing, 5 May (ZXS) -- The storm of US debt defaults has broken out again.
U.S. Treasury Secretary Janet Yellen has repeatedly warned in recent days that if Congress fails to raise the federal debt ceiling, it may trigger the first default in US history, bringing "economic and financial disaster" to the US and global economies.
At the moment, less than ten days are before the possible point for the US government to hit the debt ceiling (June 6 at the earliest). Can the United States weather this time?
Once the federal debt reaches this ceiling, the Treasury Department will use "extraordinary measures" to ensure the normal expenditure and operation of the government, delaying the arrival of "X-Date" (the date when the government will not be able to pay bills and a technical default).
In January, the United States reached its previously set debt ceiling of $1.31 trillion, and the Treasury Department could only take a series of "extraordinary measures" to survive, but the "extraordinary measures" will be exhausted on June 4, and the "X-Date" is close at hand. According to expert analysis, if the crisis is not properly resolved in time, it may lead to a series of "disasters".
First, the government has fallen into a shutdown, and the real economy has been affected.
Yi Zheng, chief macroeconomist at the Huatai Securities Research Institute, pointed out that if the two parties cannot solve the debt ceiling problem before the "X-date", the government may fall into a shutdown. In December 2018, then-President Trump failed to agree on a budget with Congress, resulting in a record 12-day shutdown and a hit on about 35,80 federal employees.
At the same time, the private sector will also be affected. Zhang Jingjing, chief macro analyst of China Merchants Securities, said that corporate confidence will be frustrated, and then large-scale layoffs will lead to a rapid rise in unemployment and consumption will also be severely hit.
Second, the burden of debt service has increased.
Because of the widespread belief that the United States can repay its debt, the federal government can borrow at relatively low interest rates. But that could change if the debt ceiling is breached.
Zhang Jingjing analyzed that if the interest rate of government bonds soars, the government's debt service burden will also worsen. An analysis by the Brookings Institution, a Washington-based think tank, said federal borrowing costs could surge by $10 billion over the next 7500 years if the debt ceiling is breached.
Third, financial markets fluctuate sharply, and the economy faces the risk of recession.
Yi Zheng analyzed that U.S. bonds are the world's most important safe assets, and the rise in the risk premium of U.S. Treasury bonds will undoubtedly impact the global financial market and tighten the financial conditions of the United States and even the world. At present, the growth rate of the US economy has fallen under multiple shocks such as high interest rates and bank turmoil, and the economy is facing the risk of recession. Failure to properly resolve the debt ceiling negotiations will heighten fears of a recession in the United States.
At present, the "three White House talks" have not broken the deadlock. Under the "rip-off" between the two parties, how will the crisis be interpreted in the follow-up?
Zhou Junzhi, chief macro analyst of Minsheng Securities, said that the debt ceiling system has been raised more than 100 times since its establishment. Raising the debt ceiling to avoid defaulting on U.S. Treasuries has become a bipartisan consensus. Although the debt ceiling will always be raised before the "X-Date", it has increasingly become a bargaining chip in the political game between the two parties in the United States, which leads to the capital market fluctuating every time the US debt touches the debt ceiling, due to the risk of US debt default.
Sun Yulong, an analyst at Huatai Futures, reminded that although the debt ceiling problem can be effectively solved in the past times, it will still have a certain impact on the market in the short term, and the two more profound impacts occurred in 2011 and 2013, which led to the downgrade of the US sovereign credit rating and the government shutdown respectively. The current debt ceiling crisis is in a more severe macro situation, and if the two parties delay reaching an agreement, the negative impact on the market will be no less than in 2011 and 2013, when there were also concerns about the debt ceiling crisis. (End)