What is the stalemate over the U.S. debt ceiling?

Source: The post is based on the article “What is the stalemate over the U.S. debt ceiling?” published in The Hindu on 12th May 2023

What is the News?

The U.S Treasury Secretary has notified US Congress that the country could default on its debt as early as June 1, 2023.

What is Debt Ceiling?

Debt Ceiling is also known as the debt limit. It is a law that limits the total amount of money the government can borrow to pay its bills.

This includes paying for federal employees, the military, Social Security and Medicare, as well as interest on the national debt and tax refunds.

Every so often the US Congress votes to raise or suspend the ceiling, so it can borrow more. The debt ceiling has been raised, extended, or revised 78 times since 1960, most recently in 2021.

The cap currently stands at roughly $31.4tn (£25.2tn). The US Treasury Secretary has warned that without more borrowing, the US will not have enough money to meet all of its financial obligations as soon as 1 June.

What happens if the US Defaults on its debt?

There is no set post-default scenario since the U.S. has never actually defaulted on its debt before.

However, if it defaults now, it would be a “catastrophic” situation for American and global financial markets. 

With trillions of dollars of global financial assets tied to the value of the US bonds, any default in debt payments could see bond prices plummet. 

This will weaken the dollar as well. And as over half the world’s foreign currency reserves are held in dollars, the value of these reserves will also drop.