D-10. As the threat of an American default looms, Joe Biden and opposition leader Kevin McCarthy wanted to believe on Monday in a way out of the crisis, but their disagreements have not yet been overcome, which leaves the risk of a a global financial crisis.
“I have just completed a productive meeting” with the Republican boss of the House of Representatives, said the American president in a press release, calling for negotiations “in good faith” to find a budget compromise. He acknowledged the persistence of “differences” that the teams of the two men will have to iron out, in a very short time. Kevin McCarthy, after a tete-a-tete in the Oval Office, also spoke of a “productive” meeting, saying “the tone tonight was better than any time before.” But he too recognizes fundamental differences, while saying he is convinced that an agreement is possible.
Treasury Secretary Janet Yellen said on Monday that it was “very likely” that the United States would run out of public money after June 1.
Biden back from the G7
This summit meeting aimed to relaunch the discussions, which had frankly turned sour this weekend, in the absence of Joe Biden. The 80-year-old Democrat, who returned from the G7 summit in Japan on Sunday, had originally planned to extend his diplomatic tour of Oceania, but the political-budgetary imbroglio in Washington forced him to cut short his trip.
To remove the risk of bankruptcy, Congress – the Senate held by the Democrats and the House with a Republican majority – must vote to raise the maximum authorized public debt ceiling.
The Republicans require, to give their green light, a sharp reduction in public spending. Joe Biden, who is campaigning for re-election in 2024 on a social justice pledge, opposes it. “We have to change course, our debt is too big,” said Kevin McCarthy before his meeting with Joe Biden.
The American president told him that he was certainly in favor of a reduction in the deficit, but that it was necessary “to take an interest in the tax loopholes and to ensure that the rich pay their fair share” of taxes.
Nobody wants to flinch
The “debt ceiling”, greater than 31 trillion dollars – a record in the world – was reached several months ago, but the federal government has so far managed the situation through accounting arbitrations.
In the event of default, the United States would no longer be able to repay the holders of Treasury bonds, this investment king of global finance. The government could also no longer pay certain salaries of civil servants, nor pensions for veterans, among others.
The consequences for the US and global economy would be catastrophic, many economists warn. So who will give in first? The American president, who knows well that a recession, whatever its political genesis, would compromise his chances of re-election? Or Kevin McCarthy, whose position depends on a handful of radical elected officials, who call on him – like former President Donald Trump – not to “bend”?
“We must arrive at a result that we can sell to both sides,” acknowledged Joe Biden on Monday, who prides himself on having become, over the course of a long parliamentary career, an outstanding negotiator.
Risk of global crisis
The left wing of the Democratic Party would rather see it pass in force by invoking the 14th amendment to the American Constitution, which prohibits “questioning” the solvency of the first world power. In this case the government would issue new loans, as if the debt ceiling did not exist. This strategy is however fraught with legal dangers, especially when one faces like Joe Biden a Supreme Court firmly anchored on the right.
In January, economist Mark Zandi warned that a long-term default could trigger a “global financial Armageddon”, with a loss of confidence in the dollar and in Treasuries, a rise in interest rates for households, a plunge on Wall Street, and a US recession spreading to the rest of the planet.