Xinhua News Agency, Washington, July 31, Hot Q&A: The US government debt ceiling will take effect and the default risk is geometric
The U.S. federal government debt ceiling will come into effect on August 1 this year after a two-year suspension. Since the Democratic and Republican parties of the US Congress are far from reaching a consensus on raising the debt ceiling, the US Treasury Department will not be able to continue issuing debt and can only use unconventional measures to free up space and buy time for debt. Analysts believe that if the US Congress has not reached an agreement on the debt ceiling by the end of September and early October, the risk of US government debt default will increase substantially and may trigger financial market volatility.
What is the debt ceiling
According to the definition of the U.S. Department of the Treasury, the debt ceiling refers to the total amount of debt that the U.S. government can borrow to fulfill existing statutory obligations authorized by Congress. These statutory obligations include social security, medical benefits, military payments, interest on national debt, tax rebates, and other expenses.
According to statistics from the U.S. Congressional Budget Office, as of June 30, the outstanding federal government debt in the United States was approximately US$28.5 trillion, of which public debt was approximately US$22.3 trillion and intergovernmental debt was approximately US$6.2 trillion.
The U.S. Congress established the debt ceiling system for the first time in 1917, aiming to regularly review the state of government spending. In recent years, the debt ceiling has increasingly become an important bargaining chip in the game between the two parties, and is tied to other issues such as cutting government spending. The two-party tug-of-war has repeatedly caused financial market volatility, but avoiding debt default is still the bottom line of the game between the two parties.
Data from the US Congressional Research Service shows that since the end of World War II, the US Congress has revised the debt ceiling 98 times, most of which have raised the debt ceiling by a certain amount. However, since 2013, the US Congress has no longer directly raised the debt ceiling, but set a time limit to suspend the debt ceiling to take effect, allowing the Treasury Department to issue bonds without restrictions during this period.
Since 2013, the U.S. Congress has suspended the debt ceiling seven times. The most recent suspension began in August 2019, when the debt ceiling was approximately $22 trillion, and Congress allowed the Treasury Department to continue issuing debt until July 31 this year. Starting from August 1, the debt ceiling will come into effect. The new debt ceiling is US$22 trillion plus the new debt balance since August 2019, which is expected to be more than US$28.5 trillion.
What is the bipartisan attitude of Congress
After the debt ceiling is restored, the U.S. Treasury Department will not be able to continue financing through the issuance of bonds, but can only use unconventional measures to free up borrowing space, such as suspending investment in federal government employee retirement funds.
U.S. Treasury Secretary Yellen wrote to Congressional leaders of both parties on July 23, urging Congress to pass legislation to raise the debt ceiling or suspend its effective as soon as possible. Yellen said that the Treasury Department is currently unable to predict how long unconventional measures can support. In some cases, after Congress ends its summer recess and resumes in mid-September, the cash and unconventional measures held by the Treasury Department may soon be exhausted.
The US Bipartisan Policy Research Center believes that Congress currently has two ways to resolve the debt ceiling issue. First, through regular legislative procedures to raise the debt ceiling or suspend its effectiveness, but this requires more than 60 votes in the Senate, which means that the Democrats must win the support of at least 10 Republican senators. Second, the Democrats can use the so-called budget adjustment process to raise the debt ceiling, which can be passed by a simple majority of 51 votes in the Senate.
Senate Republican leader McConnell recently stated that the Republican Party will not support raising the debt ceiling, and the Democrats can only use the budget adjustment process to pass relevant legislation. Ron Wyden, chairman of the Senate Finance Committee and veteran Democrat, said that the Republicans are completely wrong in using the US debt default as a bargaining chip, and the Democrats will not make any concessions.
Potential risk geometry
After the Congress resumes in mid-September, the two parties still need to negotiate the government budget for the new fiscal year beginning on October 1. Analysts believe that the game between the government budget and the debt ceiling will be intertwined, and the two-party see-saw may last longer, which will cause investors to worry about the US government’s shutdown and default risks, and intensify financial market volatility.
The Congressional Budget Office predicts that the cash and unconventional measures held by the U.S. Treasury Department can support government operations until the beginning of October. If Congress still fails to reach an agreement on the debt ceiling by then, the United States is likely to face the risk of defaulting on government debt in October or November.
From a historical point of view, the two parties have repeatedly waged games on the debt ceiling, but they all reached an agreement before the “last minute”, and neither dared to detonate the “nuclear bomb” of debt default. Yellen previously warned that a debt default will cause irreparable harm to the US economy and all American livelihoods. Observers pointed out that debt default will severely weaken the credibility of US debt, and may even shake the dollar’s main reserve currency status, trigger investors to sell US Treasury bonds, aggravate global financial market turmoil, and drag down the recovery of the world economy.
In August 2011, the continuous game between the two parties on raising the debt ceiling caused drastic fluctuations in the capital market, causing the international credit rating agency Standard & Poor’s to downgrade the US sovereign credit rating by one level from “AAA” to “AA+”. This is the first time in U.S. history that sovereign credit has been downgraded.
The Bipartisan Policy Research Center pointed out that if the US sovereign credit rating is downgraded again, it will cause greater market turmoil. The U.S. Government Accountability Office found that when the debt default date is approaching, investors will reduce their holdings of U.S. Treasury bonds that are about to expire, causing their liquidity to decline and yields to rise sharply, and pushing up the actual financing costs of the U.S. government. It is estimated that the stalemate in the debt ceiling negotiations in 2013 caused the U.S. Treasury Department to increase financing costs by tens of millions of dollars within a year.
Experts pointed out that even if the US Congress temporarily raises the debt ceiling to resolve the risk of default, the US fiscal and debt situation is still unsustainable in the medium and long term. The Congressional Budget Office warned that the increasing debt burden and higher inflation rate may increase the risk of fiscal crises, while weakening market confidence in the US dollar and raising the financing costs of private companies in the international market.