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What happens if the United States defaults on its loan?



America’s national debt is now $28 trillion.

Washington: Having avoided shutting down the US government, President Joe Biden’s Democratic lawmakers and Republican opposition face an even more high-stakes task: finding a settlement to raise the country’s borrowing limit or risk a catastrophic default.

Here’s what you need to know about the debate over the US debt limit:

What is the loan limit?

Debt limits are a legally established maximum on how much the United States can borrow to pay government bills for everything from social welfare programs to military salaries.

According to the Treasury, it has been raised, suspended or otherwise delayed 78 times since 1960: 29 times under the Democratic administration and 49 times under the Republicans.

The 2019 budget measure passed under Republican former President Donald Trump suspended the limit for two years, and when it was reinstated on August 1, 2021, the United States had reached its limit, and the national debt is now is $28 trillion.

How is the government preparing for the default?

US Treasury Secretary Janet Yellen announced that the government would take “extraordinary measures” from August, but that it would no longer have enough to pay Washington’s bills after October 18.

Yellen warned the House Financial Services Committee on Thursday that “I think it would be catastrophic for the economy and for individual families,” were a default to happen.

Social Security benefit payments for some 50 million elderly Americans would either be stopped or delayed and paychecks to soldiers would be disrupted, as would an anti-poverty program targeting families.

What will the default mean for the economy?

The United States has never defaulted on its debt, which is the backbone of the global economic system.

The consensus among analysts is that Washington’s failure to make interest payments on its debt would be a self-inflicted wound that would undermine the economy’s recovery from the COVID-19 pandemic and perhaps inflict lasting damage on the United States’ international standing.

What is the status of the talks?

Democrats control both houses of Congress – but barely. He needs 10 Republican votes to clear a filibuster in the Senate, and the opposition has made it clear that it won’t help him raise the debt limit.

The fight comes in the context of negotiations over two trillion-dollar spending bills that Biden wants Congress to enact.

Republicans argue that they will not raise the limit for paying those bills, but need to raise the limit for the payment of authorized spending under previous Republican and Democratic administrations.

Republicans want Democrats to unilaterally approve the escalation using a reconciliation process, but it is expected to take weeks and Democratic leaders insist that Republicans must join them in taking action to stop the default.

Can there be negative consequences even without the default?

Some observers in Washington believe either party is ready to let the country default, and hope they will somehow reach an agreement, potentially at the last minute.

This has happened before, but it was not without cost.

In 2011, the country came away from a default until Democratic President Barack Obama agreed to concessions to his spending plans, which he said would cut the nation’s debt and deficit long-term, though It has grown even more since then. .

Wall Street’s deadline for raising limits fell six percent, according to financial services firm Morningstar.

Then, after the markets ended their last session of the week, S&P Global Ratings downgraded US credit to its top rating below where it had sat for decades. Morningstar said that when the market reopened on Monday, the S&P 500 was down 6.6 percent.

Other rating agencies did not join in scolding the United States over the inability of their politicians to grapple with huge deficits and debt.

But as the latest impasse continues, Shai Akbas, director of economic policy at the Bipartisan Policy Center, warned of the consequences.

“As we continue to have these episodes where we become so narrow, it will increase calls for a change to the world reserve currency, which may be in China’s favor,” he said.

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)


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