“A default on the American debt would shake the financial planet”

From our correspondent in the United States,

America is once again playing at scaring itself. As negotiations continue between Joe Biden and House Speaker Kevin McCarthy to raise the debt ceiling and avoid a historic default, several Republicans have questioned the June 1 deadline put forward by the Treasury boss, Janet Yellen.

Predicting exactly what is known in the jargon as the “X-date”, the day when the American State will no longer be able to honor all its bills, is a complex science. In practice, “there is probably enough revenue coming in to pay the principal and interest on the debt provided that (the Treasury) makes it its priority,” said David Wessel, director of the Hutchins Center on Monetary and Fiscal Policy. at the Brookings Institution. But the most precarious Americans risk paying the price.

What is the “date X”?

On Monday, Treasury Secretary Janet Yellen wrote to Kevin McCarthy to reiterate that without an agreement in Congress, the state “will no longer be able to meet all government obligations by the beginning of June, potentially as early as June 1. This dreaded deadline is known as the “X date”.

This is a complex estimate. At first, the horizon seemed set at the end of summer. But several states, including California, Georgia and Alabama, have granted taxpayers affected by climate disasters a six-month extension to pay their taxes. Tax revenue is therefore lower than expected.

June 1 or 8, early August… The date is debatable

If Janet Yellen marked June 1 in the calendar, the bank Golden Sachs estimates that a default would probably not take place before June 8 or 9. Others, such as the Bipartisan Policy Center, expect a period from early June to early August. Technically, the debt ceiling of 31.4 trillion dollars was reached last January. Since then, the Treasury has multiplied “extraordinary measures” to save money to avoid disaster.

With less than $100 billion remaining in the coffers, the clock is ticking. The state has big bills arriving on June 1, with 101 billion in social spending (half of which for Medicare, public health insurance for seniors). The moment of truth on the debt will be June 15, with the scheduled payment of $2 billion in interest. If a default is avoided by then, quarterly tax receipts could give the Treasury some breathing room until August.

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priority time

Salaries and pensions of civil servants and the military, health of the elderly and the poorest, social benefits related to childhood, repayment of the debt (principal and interest)… Any breach of an obligation of the American State would constitute a default in payment. history and a dive into the unknown.

“Would that be catastrophic? The truth is that no one really knows, because it never happened,” admits David Wessel. According to a plan drafted in 2011, it is likely that the Treasury would choose to prioritize its obligations over debt, in order to avoid a sovereign default. Other payments could be suspended, penalizing the tens of millions of Americans who benefit from them.

What consequences could a sovereign default have?

Loss of confidence in the dollar and in Treasury bonds, rising interest rates for households, a plunge on Wall Street, global recession… “A default on Treasury debt, the safest asset in the world, would shake the financial planet,” Wessel speculates. The cost, which is difficult to estimate, is considered so high that the consensus always counts on a last-minute agreement, or on a flash default.

“If it only lasted a day or two, it would be serious but not catastrophic. But if the stalemate lasts several days or weeks, it would seriously damage the economy, ”assures the expert. With far wider consequences, he said: “It would challenge the ability of our democracy to function, and further erode trust in government already at its lowest. »

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