WASHINGTON (AP) — If the debt crisis roiling Washington were eventually to send the United States crashing into recession, America’s economy would hardly sink alone.
The repercussions of a first-ever default on the federal debt would quickly reverberate around the world. Orders for Chinese factories that sell electronics to the United States could dry up. Swiss investors who own U.S. Treasurys would suffer losses. Sri Lankan companies could no longer deploy dollars as an alternative to their own dodgy currency.
“No corner of the global economy will be spared’’ if the U.S. government defaulted and the crisis weren’t resolved quickly, said Mark Zandi, chief economist at Moody’s Analytics.
EXPLAINER: Why Biden is cautious about using the 14th Amendment to address the debt ceiling crisis
Zandi and two colleagues at Moody’s have concluded that even if the debt limit were breached for no more than week, the U.S. economy would weaken so much, so fast, as to wipe out roughly 1.5 million jobs.
And if a government default were to last much longer — well into the summer — the consequences would be far more dire, Zandi and his colleaguesfound in their analysis: U.S. economic growth would sink, 7.8 million American jobs would vanish, borrowing rates would jump, the unemployment rate would soar from the current 3.4 percent to 8 percent and a stock-market plunge would erase $10 trillion in household wealth.
Of course, it might not come to that. The White House and House Republicans, seeking a breakthrough,concluded a round of debt-limit negotiations Sunday, with plans to resume talks Monday. The Republicans have threatened to let the government default on its debts by refusing to raise the statutory limit on what it can borrow unless President Joe Biden and the Democrats accept sharp spending cuts and other concessions.
U.S. debt, long viewed as ultra-safe
Feeding the anxiety is the fact that so much financial activity hinges on confidence that America will always pay its financial obligations. Its debt, long viewed as an ultra-safe asset, is a foundation of global commerce, built on decades of trust in the United States. A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.
“A debt default would be a cataclysmic event, with an unpredictable but probably dramatic fallout on U.S. and global financial markets,’’ said Eswar Prasad, professor of trade policy at Cornell University and senior fellow at the Brookings Institution.
The threat has emerged just as the world economy is contending with a panoply of threats — from surging inflation and interest rates to the ongoing repercussions of Russia’s invasion of Ukraine to the tightening grip of authoritarian regimes. On top of all that, many countries have grown skeptical of America’s outsize role in global finance.
In the past, American political leaders generally managed to step away from the brink and raise the debt limit before it was too late. Congress has raised, revised or extended the borrowing cap 78 times since 1960, most recently in 2021.
Yet the problem has worsened. Partisan divisions in Congress have widened while the debt has grown after years of rising spending and deep tax cuts. Treasury Secretary Janet Yellen has warned that the government could default as soon as June 1 if lawmakers don’t raise or suspend the ceiling.
‘Shockwaves through the system’
“If the trustworthiness of (Treasurys) would become impaired for any reason, it would send shockwaves through the system … and have immense consequences for global growth,’’ said Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund.
Treasurys are widely used as collateral for loans, as a buffer against bank losses, as a haven in times of high uncertainty and as a place for central banks to park foreign exchange reserves.
READ MORE: Yellen warns of economic ‘calamity’ if Congress doesn’t raise debt limit
Given their perceived safety, the U.S. government’s debts — Treasury bills, bonds and notes — carry a risk weighting of zero in international bank regulations. Foreign governments and private investors hold nearly $7.6 trillion of the debt — roughly 31 percent of the Treasurys in financial markets.
Because the dollar’s dominance has made it the de facto global currency since World War II, it’s relatively easy for the United States to borrow and finance an ever-growing pile of government debt.
But high demand for dollars also tends to make them more valuable than other currencies, and that imposes a cost: A strong dollar makes American goods pricier relative to their foreign rivals, leaving U.S. exporters at a competitive disadvantage. That’s one reason why the United States has run trade deficits every year since 1975.
Central banks’ stockpiles of dollars
Of all the foreign exchange reserves held by the world’s central banks, U.S. dollars account for 58 percent. No. 2 is the euro: 20 percent. China’s yuan makes up under 3 percent, according to the IMF.
Researchers at the Federal Reserve have calculated that from 1999 to 2019, 96 percent of trade in the Americas was invoiced in U.S. dollars. So was 74 percent of trade in Asia. Elsewhere outside of Europe, where the euro dominates, dollars accounted for 79 percent of trade.
So reliable is America’s currency that merchants in some unstable economies demand payment in dollars, instead of their own country’s currency. Consider Sri Lanka, battered by inflation and a dizzying drop in the local currency. Earlier this year, shippers refused to release 1,000 containers of urgently needed food unless they were paid in dollars. The shipments piled up at the docks in Colombo because the importers weren’t able to obtain dollars to pay the suppliers.
“Without (dollars), we can’t do any transaction,” said Nihal Seneviratne, a spokesman for Essential Food Importers and Traders Association. “When we import, we have to use hard currency — mostly the U.S. dollars.’’
Likewise, many shops and restaurants in Lebanon, where inflation has raged and the currency has plunged, are demanding payment in dollars. In 2000, Ecuador responded to an economic crisis by replacing its own currency, the sucre, with dollars — a process called “dollarization’’ — and has stuck with it.
The go-to haven for investors
Even when a crisis originates in the United States, the dollar is invariably the go-to haven for investors. That’s what happened in late 2008, when the collapse of the U.S. real estate market toppled hundreds of banks and financial firms, including once-mighty Lehman Brothers: The dollar’s value shot up.
“Even though we were the problem — we, the United States — there was still a flight to quality,’’ said Clay Lowery, who oversees research at the Institute of International Finance, a banking trade group. “The dollar is king.’’
If the United States were to pierce the debt limit without resolving the dispute and the Treasury defaulted on its payments, Zandi suggests that the dollar would once again rise, at least initially, “because of the uncertainty and the fear. Global investors just wouldn’t know where to go except to where they always go when there’s a crisis and that’s to the United States.’’
But the Treasury market would likely be paralyzed. Investors might shift money instead into U.S. money market funds or the bonds of top-flight U.S. corporations. Eventually, Zandi says, growing doubts would shrink the dollar’s value and keep it down.
Government’s strategy if debt cap is breached
In a debt-ceiling crisis, Lowery, who was an assistant Treasury secretary during the 2008 crisis, imagines that the United States would continue to make interest payments to bondholders. And it would try to pay its other obligations — to contractors and retirees, for example — in the order that those bills became due and as money became available.
For bills that were due on June 3, for example, the government might pay on June 5. A bit of relief would come around June 15. That’s when government revenue would pour in in as many taxpayers make estimated tax payments for the second quarter.
The government would likely be sued by those who weren’t getting paid — “anybody who lives off veterans’ benefits or Social Security,’’ Lowery said. And ratings agencies would likely downgrade U.S. debt, even if the Treasury continued to pay interest to bondholders.
READ MORE: Debt limit talks make little apparent progress as Biden, world leaders watch from afar
The dollar, though it remains dominant globally, has lost some ground in recent years as more banks, businesses and investors have turned to the euro and, to a lesser extent, China’s yuan. Other countries tend to resent how swings in the dollar’s value can hurt their own currencies and economies.
A rising dollar can trigger crises abroad by drawing investment out of other countries and raising their cost of repaying dollar-denominated loans. The United States’ eagerness to use the dollar’s clout to impose financial sanctions against rivals and adversaries is also viewed uneasily by some other countries.
So far, though, no clear alternatives have emerged. The euro lags far behind the dollar. Even more so does China’s yuan; it’s hamstrung by Beijing’s refusal to let its currency trade freely in global markets.
But the debt ceiling drama is sure to heighten questions about the enormous financial power of the United States and the dollar.
“The global economy is in a pretty fragile place right now,’’ Obstfeld said. “So throwing into that mix a crisis over the creditworthiness of U.S. obligations is incredibly irresponsible.’’
AP Writer Bharatha Mallawarachi in Colombo, Sri Lanka, contributed to this report.
FAQs
A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.
What would happen if the US stopped paying its debt? ›
A default on U.S. debt could trigger a worldwide recession and upend stock markets in addition to wreaking havoc in Americans' financial lives. Anna Helhoski is a senior writer covering economic news and trends in consumer finance at NerdWallet.
How likely is the US to default? ›
There's just a 2% possibility the U.S. government will default on its loans, according to analysts at Deutsche Bank, despite days of stalled-out negotiations.
How does U.S. debt affect the economy? ›
A nation saddled with debt will have less to invest in its own future. Rising debt means fewer economic opportunities for Americans. Rising debt reduces business investment and slows economic growth. It also increases expectations of higher rates of inflation and erosion of confidence in the U.S. dollar.
How do you prepare for a US default? ›
Experts share how to prepare for possible US debt default
- Build an emergency fund. ...
- Reduce debt. ...
- Wait to buy a home. ...
- Diversify your investments but don't overdo it. ...
- Review and adjust financial plans.
U.S. debt, long viewed as ultra-safe
Its debt, long viewed as an ultra-safe asset, is a foundation of global commerce, built on decades of trust in the United States. A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.
What will happen if America defaults on its debt? ›
Economically, according to forecasts by the White House even a brief default would result in half a million lost jobs and a somewhat shallow recession. A protracted default would push those numbers to a devastating eight million lost jobs and a severe recession, with the economy shrinking by more than 6 percent.
Who does the US owe debt to? ›
Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.
Will the stock market crash if the US defaults on its debt? ›
A U.S. debt default would lead to a slump in stock and bond markets, while eroding the U.S.' financial standing in the world, analysts say.
What countries are most likely to default? ›
10 Countries That Are Most Likely to Default
- Tunisia. ...
- Ghana. ...
- Egypt. ...
- Kenya. ...
- Ethiopia. ...
- El Salvador. ...
- Pakistan. ...
- Belarus. The country is facing Western sanctions and economic turmoil due to its support of Russia in the Ukraine campaign.
According to usafacts.org, as of January 2023, Japan owned $1.1 trillion in US Treasuries, making it the largest foreign holder of the national debt. The second-largest holder is China, which owned $859 billion of US debt.
What country has the most debt? ›
According to data published by London-based investment fintech Invezz, Japan, Greece, Italy, Portugal, and the US are the top five nations with the highest level of government debt.
Why is America in so much debt? ›
Nearly every year, the government spends more than it collects in taxes and other revenue, resulting in a deficit. (The debt ceiling, set by Congress, caps how much the U.S. can borrow to pay for its remaining bills.) The national debt, now at a historic high, is the buildup of its deficits over time.
How can I protect my money if US defaults on debt? ›
That means tamping down on excess spending, making a budget, and shoring up emergency savings to cover at least three months of living expenses. Since a debt default would likely send interest rates soaring, any credit card debt you're saddled with may soon cost you more.
What does default do to a country? ›
But it does happen. The most common causes of sovereign defaults include economic stagnation, political instability, and financial mismanagement. When countries do default they are often permitted to borrow again quickly, but defaults can inflict severe economic costs in the short run.
What does going into default mean for a country? ›
A sovereign default happens when a country's government fails to pay its debt obligations. A sovereign default can have serious economic consequences for the borrowing nation, making it harder and more expensive to borrow money in the future and pay its ongoing obligations.
Could the US ever get out of debt? ›
Eliminating the U.S. government's debt is a Herculean task that could take decades. In addition to obvious steps, such as hiking taxes and slashing spending, the government could take a number of other approaches, some of them unorthodox and even controversial. Below are some of these options.
Does the US ever have to pay off its debt? ›
The US doesn't actually have to pay off its $31 trillion mountain of debt, according to top economist Paul Krugman, hitting back at the idea that government finances can be compared to household balance sheets in an op-ed weeks before the US possibly defaults on some obligations.
What are two consequences of defaulting on a debt? ›
A loan default can drastically reduce your credit score, impact your future eligibility for credit and even lead to the lender seizing your personal property.
Does the US owe most of its debt to itself? ›
Many people believe that much of the U.S. national debt is owed to foreign countries like China and Japan, but the truth is that most of it is owed to Social Security and pension funds right here in the U.S. This means that U.S. citizens own most of the national debt.
Total national debt
The remaining debt, which totals about $6.83 trillion, can be classified as intragovernmental holdings. This is basically debt the government owes itself.
Why does the US borrow money from China? ›
China's demand for Treasurys helps keep U.S. interest rates low. It allows the U.S. Treasury to borrow more at low rates. Congress can then increase the federal spending that spurs U.S. economic growth.
Does China owe the US money? ›
Continuing a trend that began early in 2021, China's portfolio of U.S. government debt in May dropped to $980.8 billion, according to Treasury Department data released Monday. That's a decline of nearly $23 billion from April and down nearly $100 billion, or 9%, from the year-earlier month.
How much of U.S. debt is owned by China? ›
Top Foreign Holders of U.S. Debt
| Rank | Country | Share of Total |
|---|
| 1 | 🇯🇵 Japan | 14.7% |
| 2 | 🇨🇳 China | 11.9% |
| 3 | 🇬🇧 United Kingdom | 8.9% |
| 4 | 🇧🇪 Belgium | 4.8% |
6 more rowsMar 24, 2023
In fact, Treasuries are a logical investment for a country with high foreign currency reserves. China currently holds almost 11.60% of U.S. foreign debt.
What happens if U.S. debt ceiling is reached? ›
Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the United States' financial market and tip its economy—and the world's—into immediate recession.
What should I invest in if the U.S. defaults? ›
Treasurys have been seen as some of the safest investments worldwide. They are held by companies and countries the world over and used as collateral in all kinds of financial transactions. If the federal government failed to pay bondholders, it would have unimaginable consequences for the standing of the U.S.
What happens to the price of gold if the U.S. defaults? ›
If the U.S. government defaults on its debt - as it appears at risk of doing at the moment - it would very likely prove to be a bullish catalyst for gold prices for at least two reasons: Gold has traditionally been viewed as a safe haven, so whenever major macro disruptions occur, gold prices tend to shoot higher.
Which country has no debt? ›
The 20 countries with the lowest national debt in 2022 in relation to gross domestic product (GDP)
| Characteristic | National debt in relation to GDP |
|---|
| Macao SAR | 0% |
| Brunei Darussalam | 2.06% |
| Kuwait | 2.92% |
| Hong Kong SAR | 4.26% |
9 more rowsMay 11, 2023
In 2023, there were two sovereign defaults - Argentina and Mozambique.
Countries with the Lowest National Debt
- Brunei. 3.2%
- Afghanistan. 7.8%
- Kuwait. 11.5%
- Democratic Republic of Congo. 15.2%
- Eswatini. 15.5%
- Palestine. 16.4%
- Russia. 17.8%
However, this has declined over time, and as of 2022 they controlled approximately 25% of foreign-owned debt. As of January 2023, the five countries owning the most US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion).
How much money does France owe the United States? ›
The total “commercial” debt owed by France to the United States was given by M. Clémentel as $609,357,000.
Why does the US owe Japan so much money? ›
Because Japan exports so many goods to the U.S. and other nations, the country frequently develops an account surplus in dollars - the currency the U.S. and other countries give Japan in exchange for their products.
What country is 1 in debt? ›
Japan has the highest percentage of national debt in the world at 259.43% of its annual GDP.
Is China in a debt crisis? ›
China's $23 Trillion Local Debt Crisis Threatens Xi's Economy - Bloomberg.
When was the last year the United States had a budget surplus? ›
In 2022, the U.S. government had a budget deficit of 1.36 trillion U.S. dollars. This is compared to 2000, when the government had a budget surplus of 0.24 trillion U.S. dollars.
When was the last time the United States was debt free? ›
As a result, the U.S. actually did become debt free, for the first and only time, at the beginning of 1835 and stayed that way until 1837. It remains the only time that a major country was without debt. Jackson and his followers believed that freedom from debt was the linchpin in establishing a free republic.
Who does the US borrow money from? ›
The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government.
How much is the United States worth? ›
For the fourth quarter of 2019, total wealth in the U.S. was $111.04 trillion.
Certificates of deposit (CDs) issued by banks and credit unions also carry deposit insurance. U.S. government securities–such as Treasury notes, bills, and bonds–have historically been considered extremely safe because the U.S. government has never defaulted on its debt.
Can banks remove defaults? ›
Once a default is recorded on your credit profile, you can't have it removed before the six years are up (unless it's an error). However, there are several things that can reduce its negative impact: Repayment. Try and pay off what you owe as soon as possible.
What would a US default look like? ›
Americans' investments would take a major hit as stocks lose as much as a third of their value, wiping out around $12 trillion in household wealth, according to Moody's Analytics. The broadest economic impact of a US debt default would be a recession that would encompass the global economy, including sharp job losses.
What happens if a country refuses to pay its debt? ›
Trade Embargo
Foreign creditors are often influential in their home country. Hence after default, they convince their countries to impose trade embargos on the defaulting nations. These embargos block the inflow and outflow of essential commodities into a nation thereby choking its economy.
What happens if America defaults? ›
Its debt, long viewed as an ultra-safe asset, is a foundation of global commerce, built on decades of trust in the United States. A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.
What happens if US government defaults? ›
So if the U.S. cannot pay its creditors, interest rates on U.S. debt would go up, creating a cascade of higher interest rates. So mortgage rates, credit card rates, car loan rates. All would become more expensive. Finally, there is a real concern about the economy — that a default could spark a recession.
Why can't the US make money to pay off debt? ›
The Fed tries to influence the supply of money in the economy to promote noninflationary growth. Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse.
When was the last time the US was not in debt? ›
When was the last time the U.S. was debt free? January 1835 was the first and only time all of the government's interest-bearing debt was paid off, according to the Treasury Department.
What country is most in debt? ›
Norway is the country with the highest level of household debt based on OECD data followed by Denmark and the Netherlands.
Why does the US owe money to itself? ›
Intragovernmental Debt
Intragovernmental holdings totaled more than $6.89 trillion in January 2023. 1 Why would the government owe money to itself? Because some agencies, like the Social Security Trust Fund, take in more revenue from taxes than they need.
Since the government almost always spends more than it takes in via taxes and other revenue, the national debt continues to rise. To finance federal budget deficits, the U.S. government issues government bonds, known as Treasuries.
How high can the US debt go? ›
The debt limit caps the total amount of allowable outstanding U.S. federal debt. The U.S. hit that limit—$31.4 trillion—on January 19, 2023, but the Department of the Treasury has been undertaking a set of “extraordinary measures” so that the debt limit does not yet bind.
Is there any country not in debt? ›
Learning about Countries and Their Debt
The best example can be taken from Hong Kong (it is a one of the debt free countries), whose economy has the least debt to GDP ratio. It is an almost debt free country. It has a well-regulated financial system and large foreign reserves.
What countries have no debt? ›
The 20 countries with the lowest national debt in 2022 in relation to gross domestic product (GDP)
| Characteristic | National debt in relation to GDP |
|---|
| Macao SAR | 0% |
| Brunei Darussalam | 2.06% |
| Kuwait | 2.92% |
| Hong Kong SAR | 4.26% |
9 more rowsMay 11, 2023
Top Foreign Holders of U.S. Debt
| Rank | Country | U.S. Treasury Holdings |
|---|
| 1 | 🇯🇵 Japan | $1,076B |
| 2 | 🇨🇳 China | $867B |
| 3 | 🇬🇧 United Kingdom | $655B |
| 4 | 🇧🇪 Belgium | $354B |
6 more rowsMar 24, 2023
