US DEBT CEILING CRISIS -UPSC Current Affairs

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Context

US President Joe Biden is meeting Republican leader Kevin McCarthy in a bid to resolve the debt-ceiling crisis.

Details

For the first time, the United States faces the serious risk of defaulting on its debt, which experts say would not just adversely affected the US economy but would also carry significant pains for the world economy.

What is the US debt ceiling?

The debt ceiling is the amount of money the US government is allowed to borrow to pay the nation's bills.
In the United States, the Congress comprising the House and Senate approves the budget and funds for the Executive branch to run the country.

Background

The issue of debt ceiling arises from the fact that the United States has been running a fiscal deficit since 2001.
Since income of the government is less than the expenditure, the government has to borrow to function.
There is a limit to that borrowing which is periodically increased to allow the government to borrow more and continue working.
If the debt ceiling is not increased or suspended, the government would not be able to borrow and pay its outstanding dues.
The US has defaulted on its debt just once before, in 1979. A technical bookkeeping glitch resulted in delayed bond payments, an error that was quickly rectified and only affected a small number of investors.
US Secretary of Treasury Janet Yellen has said the United States could default in early June if the debt ceiling is not extended.

What is the ongoing debt-ceiling crisis?

So far, the debt-ceiling has been increased periodically to enable the US government to function and prevent the country from defaulting.
However, the Republicans in the House and the Biden administration are currently at an impasse.
The Republicans passed a bill in the House in April that would increase the debt-ceiling by $1.5 trillion or until March 31, 2024 —whichever comes first— along with a set of conditions that Democrats and Biden administration have so far not accepted.
While the Republicans argue that measures proposed by them are required for fiscal health of the United States, the Democrats say the Republicans are cutting much-needed welfare measures.

Impact of possible US default

The result of the US default would be a disaster for the US economy.
Even if the US debt default is in place for just one week, 1.5 million jobs across the world would be lost, according to an estimate by Moody's Analytics, which added that a prolonged default could cost 7.8 million American jobs.
The United States would be hit by a recession and share markets would become very volatile.
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.

Effect of US default on world

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 US Treasurys would suffer losses.
Sri Lankan companies could no longer deploy dollars as an alternative to their own dodgy currency.
Of all the foreign exchange reserves held by the world's central banks, US dollars account for 58 per cent.
From 1999 to 2019, 96 per cent of trade in the Americas was invoiced in US dollars. So was 74 per cent of trade in Asia.
A rising dollar can trigger crises abroad by drawing investment out of other countries and raising their cost of repaying dollar-denominated loans.

PRACTICE QUESTION

Q) What is the ongoing debt-ceiling crisis in the US? Discuss its potential impact on the world economy. (250 words)