Debt Ceiling: Will The US Default On June 1? What Will Happen If It Does? An Explainer

Will The US Default On June 1? What Will Happen If It Does? An Explainer

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Debt Ceiling: Will The US Default On June 1? What Will Happen If It Does? An Explainer

The Joe Biden government has less than a month to raise the US debt ceiling.

A crucial meeting between US President Joe Biden and the House and Senate leaders of both the parties on Tuesday to discuss budget priorities and raise the debt ceiling limit ended with no agreement. This is not a good news for the country that is running out of cash to pay its bills. Lawmakers have less than a month (till June 1) to pass legislation to increase or suspend the debt ceiling. If the US defaults, it may cause a global economic catastrophe.

What is debt ceiling?

In the US, the debt ceiling is a legislative limit on the amount of money that the US federal government can borrow. It was created under the Second Liberty Bond Act of 1917 and is also known as the debt limit or statutory debt limit.

When the debt ceiling is raised, the US Treasury must find other ways to pay expenses, like paying salaries of federal employees, the military, social security and medicare, as well as interest on the national debt and tax refunds.

As a legislative practice, the US Congress votes to raise of suspend the ceiling so that the amount can be altered.

According to the BBC, the cap currently stands at $31.4 trillion. That limit was breached in January, but the treasury used “extraordinary measures” to provide more cash to the government.

What happens if debt ceiling is not raised?

Without an agreement to increase the borrowing limit, the US federal government can run out of money. It means the government might not be able to pay wages and make other payments. National parks and other agencies would shut down in such a scenario, though it has never happened before.

US Treasury Secretary has already warned of dire consequences. “It’s Congress’s job to do this. If they fail to do it, we will have an economic and financial catastrophe that will be of our own making,” she said on Sunday.

Ms Yellen also had conversations with CEOs to discuss the dangers of brinkmanship, news agency AFP reported.

What happens if the US defaults?

If the debt ceiling is not raised, the entire international financial system will be jolted since more than $500 billion in US debt gets traded every day.

According to Moody’s Analytics, if the stand-off between the legislature and the executive prolongs, stock prices will fall by almost a fifth and US economy will contract more than 4 per cent.

The agency also said that this will lead to a loss of more than seven million jobs.

Political developments

Though such stand-offs are not new, this protracted fight threatens to unleash a turmoil on a global scale. The reason for this is the lower chamber – the House of Representatives – is controlled by Republicans, while the 100-member Senate is run by Democrats.

The split has significantly affected both the parties’ ability to pass major legislation through Congress, particularly Democrats, who also hold the presidency.

Forbes reported that Republicans have passed a measure in the lower house to raise the debt limit, along with many other proposals that Mr Biden is unlikely to support.

The US President has called for passing the debt ceiling on a standalone basis, something Republicans appear unlikely to agree to.

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