The US Debt Ceiling: What It Is, Why It Matters to the World, and What’s Next?

He. She The agreement was tentatively made between the White House and Republican leaders Regarding the suspension of the debt ceiling in the United States took weeks of negotiations. However, this is just the beginning of a much more thorny debate: the legislative debate.

United State It is fast and dangerously close to the June 5 deadline by which it could sustain a default that many have described as “catastrophic,” not only for the country’s economy, but for the rest of the world.

On that day, according to Treasury departmentThe state treasury will remain without sufficient funds to finance its obligations. Unless Congress approves the bill, the bill has already been circulated to members of both parties.

But what is the debt ceiling and why is it so important to the global economy?

Suspension of payments, the main fear in the corridors of the Capitol

The US fiscal year begins on October 1 each year, and to fund its budget, Washington regularly sets a limit on federal borrowing, which today equals nearly 120% of the country’s annual economic output.

That cap was exceeded in January, less than four months since the start of the fiscal year. The Treasury kept its commitments within the permissible limit through exceptional measures while continuing to borrow from investors.

But the Treasury warned that these measures were no longer sufficient as of June 5. Since the Treasury Department is borrowing about 20 cents for every dollar it spends, then Washington will start defaulting on lenders, citizens, or both.

Removing the debt ceiling would allow the government to pay for expenditures previously authorized by Congress. But his critics argue that excessive spending is being unleashed, leading to a deficit that is growing.

There is a tentative agreement already… What next?

This disastrous scenario can be forgotten if the agreement reached at the end of the week by the Democratic president is approved by Congress. Joe Biden and the highest ranking Republican in Congress Kevin McCarthyTo suspend the debt ceiling, which today stands at $31.4 trillion.

The legislature has one week to approve the bill. First, in the House of Representatives, which the Republicans control by a slim majority 222-213. A simple majority will be required for approval (at least 218 votes if all members are present).

Debate and approval in the House may take a day or two, and are expected to take longer in the Senate. In the Senate, the Democrats have a 51-49 advantage and the Vice President Kamala Harris Cast a tiebreaker vote if the vote is 50-50.

The way forward is not entirely clear, if one considers that some far-right Republicans or some liberal Democrats dissatisfied with what their leaders have negotiated could vote negative. But legislative failure is the most tragic and least desirable scenario.

Why do decisions in Washington affect the rest of the world?

The shock of the world’s largest economy may reverberate through global financial markets, as the value of US bonds is called into question. These assets are among the safest investments and serve as a reference for the global financial system.

In addition, according to experts, the US economy will almost certainly fall into recession if the government stops paying such important things as soldiers’ salaries or Social Security benefits for the elderly.

In a worst-case scenario, economists expect millions of Americans to lose their jobs and rating agencies could downgrade the credit rating of the United States, as was the case in 2011.

c.On Reuters and AP