The financial structure of every country features certain concepts that dictate its economic narrative. Kavan Choksi underlines that the “debt ceiling” of the United States is one such yet complex concept. It refers to the maximum limit set by Congress on the amount of national debt the U.S. government can accrue in order to meet its financial obligations. Whenever required, the US Congress votes to raise or suspend the ceiling so it can borrow more.
Kavan Choksi discusses the potential global consequences of the U.S. hitting its debt ceiling
The United States debt ceiling functions as a type of a regulatory limit on the amount of national debt the U.S. Treasury can accrue to pay for the expenditures already approved by the Congress. In a way, the debt ceiling acts as a checkpoint for monitoring and controlling government spending. The debt ceiling has been raised or suspended multiple times over the last several decades. Each of these changes reflected the evolving realities of the country as well as the necessities of government spending and borrowing.
Due to the interconnectedness of the global economy of today, the U.S. hitting its debt ceiling can have significant global implications. Here are a few of them:
- Impact on Global Markets: The U.S. Treasury market is the largest and most liquid bond market across the globe. In case the United States defaults on its debt obligations, it is likely to lead to widespread volatility in global markets. Both foreign and domestic investors may start doubting the creditworthiness of the U.S, and hence begin to sell off U.S. Treasury securities. Such a situation can disrupt financial markets worldwide.
- Currency fluctuations: The United States dollar is the primary reserve currency of the world. This basically means that multiple countries across the world hold USD in considerable quantities in order to carry out international trade. A U.S. debt default may weaken the dollar, and lead to currency fluctuations and economic instability globally.
- Global economic slowdown: The U.S. economy has a critical role to play in driving global growth. Any kind of major economic disruption in the United States, such as a recession triggered by a debt default, has a good chance of having a domino effect on the world economy. It may potentially lead to a global economic slowdown or recession.
- Impact on international debt holders: Nations like Japan and China hold significant amounts of U.S. debt. These countries would face heavy losses if the U.S. were to default. Such losses can severely impact their economic stability.
- Reduced confidence in the global financial system: The United States is widely seen as a global economic leader. As a result, its debt is considered one of the safest investments. A debt default by the United States could shake confidence in the global financial system, ultimately paving the way for economic uncertainties.
Kavan Choksi mentions that a U.S. default can lead to a downgrade in its credit rating; as a result, borrowing costs for the U.S. could increase. This may subsequently impact borrowing costs globally, and make it more expensive for individuals, businesses and governments worldwide to borrow money.