How the US Debt Ceiling Crisis Threatens the Global Economy and What to Expect Next

The international rating agency Fitch announced on the evening of the 24th that it has put the long-term foreign currency issuer default rating of the United States on the negative watch list because partisanship in the United States has prevented the two parties in Congress from reaching an agreement on solving the debt ceiling issue.

Fitch said in a statement that the bipartisan brinkmanship in the U.S. Congress over the debt ceiling and the U.S. government’s failure to effectively address medium-term fiscal challenges, resulting in rising budget deficits and mounting debt burdens, bode well for U.S. credibility. Downside risk.

Fitch said that the agency still believes that the two parties will eventually reach an agreement on raising the debt ceiling, but the risk of not reaching an agreement in time is increasing. Failure to reach an agreement on the debt ceiling by the deadline would be a negative sign that the US’s overall governance and willingness to meet debt obligations in a timely manner is unlikely to be consistent with a “AAA” rating.

According to US media reports, Fitch’s warning means that the US’s current “AAA” sovereign credit rating is at risk of being downgraded.

U.S. Treasury Secretary Yellen recently warned that if Congress does not take measures to raise the federal government’s debt ceiling or suspend the debt ceiling, the U.S. government is “very likely” to fall into debt default in early June.

Mark Zandi, chief economist of Moody’s Analytics, said a few days ago that if the two parties still cannot reach an agreement after a week, the financial market will be hit harder. Once the U.S. credit rating is downgraded, it will trigger a wide-ranging downgrade of the ratings of related entities, and “the resulting confusion will be incalculable.”

In 2011, the deadlock over the debt ceiling between Republicans in the U.S. Congress and the Obama administration triggered violent fluctuations in the global capital market, leading Standard & Poor’s to downgrade the U.S. sovereign credit rating and triggering turmoil in the international financial market.
What will happen to the United States if the US debt defaults?
On the 24th local time, the White House and Republicans in Congress held negotiations on the debt ceiling again, and the negotiations are still ongoing. In previous negotiations, both sides refused to make concessions, and the talks ended without result. On the same day, McCarthy, Speaker of the US House of Representatives, said that there are still differences between the two sides on some content, but McCarthy is still optimistic about the outcome of the negotiations. He once again reiterated that the United States will not default on its debt. On the same day, U.S. Treasury Secretary Yellen once again warned that if Congress still does not take action to raise the debt ceiling, the U.S. government is “very likely” to fall into debt default in early June, which is unacceptable.

Once a debt default occurs, it may trigger a chain reaction

The U.S. federal government is getting closer to a possible default on its debt, and Democrats and Republicans are still at loggerheads over it.

If a debt default occurs, what kind of chain reaction will it trigger?

June 1
If the U.S. does not raise the debt ceiling, and the current U.S. tax revenue cannot cover expenditures, the U.S. Treasury Department’s cash pool will face drying up that day, U.S. soldiers’ salaries will be stopped, and the federal medical insurance that serves the elderly in the United States will be cut off. Will not be able to pay normally. At the same time, the U.S. Treasury Department will try to borrow funds to repay the U.S. debt that matures that day, but if it cannot borrow more than 100 billion U.S. dollars, the U.S. will default on repaying U.S. debt and begin to enter a state of debt default. This will greatly increase the risk of US debt in the hands of investors and shake the global financial system.

June 2
If the two parties in the United States still fail to reach an agreement to raise the debt ceiling, pensions in the United States will stop, and states will not be able to receive funds to provide medical insurance subsidies for the poor, and employee salaries that rely on financial allocations in most areas will also begin to stop. .

June 6
Manufacturers of weapons and equipment to the U.S. military will start not receiving their receivables.

June 8
With the shutdown of the medical insurance system, the US medical system will fall into a deep crisis one week after the outbreak of the US debt crisis.

June 9
As more and more U.S. debt matures, many public schools in the United States will cease operations.

June 15
The U.S. Treasury Department will start to use all revenue to repay U.S. debt, but this means that the situation will be “extraordinarily dangerous” and the U.S. Treasury Department will stop providing funds to all other projects.
Some media pointed out that the chain reaction after the U.S. debt default will quickly affect the transactions of commodities and financial derivatives, which will “trigger economic disaster” in the global financial market.
JPMorgan Chase said a few days ago that if the United States defaults on its debt, it will have a lasting impact, and the United States must be very careful, otherwise it may trigger a financial panic. Interactive Brokers of the United States stated that regardless of the outcome of the debt ceiling negotiations, investors will face a “lose-lose” situation: if an agreement is not reached, it will lead to a recession in the US economy; if an agreement is reached, it means that the US government will issue more debt. Multi-national debt, thus tightening market liquidity.

Burst in the early morning! Wall Street in the United States, banks and institutions are waiting…
US media: US debt ceiling negotiations have not yet reached an
agreement . Rep. Garrett Graves, one of the key negotiators for House Speaker McCarthy, said, “We’ve made some progress on some key issues. We still have major issues and we haven’t closed the gaps right now.”

The risk of US debt default is approaching Wall Street institutions are preparing for the
approaching risk of US debt default, triggering high risk aversion among Wall Street institutions. According to a Reuters report on the 26th, banks and asset management institutions on Wall Street in the United States are preparing for a possible debt default by the federal government.

Debt default may lead to a sharp rise in U.S. bond yields, a plunge in the stock market, and a freeze in the short-term financing market. Some Wall Street financial institutions that rely on U.S. Treasury bonds have begun to avoid government bonds that will mature in June, and some financial institutions are preparing to deal with government bonds that are at risk of default.