D-10. While the threat of a US 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. “I have just completed a productive meeting” with the Republican head of the House of Representatives, the US president said in a statement, calling for “good faith” negotiations 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. Treasury Secretary Janet Yellen said Monday it was “very likely” that the United States would run out of public money after June 1.
Civil servants without salary, stock market panic, collapse of the global economy,… What can be the consequences of the default of the largest economy in the world, an unprecedented situation?
for americans
“Any American who depends directly or indirectly on government pay will no longer receive their pay,” Gregory Daco, chief economist at EY Parthenon, said in an interview with AFP. This refers to the salaries and pensions of civil servants and soldiers, social benefits related to children, medical care, low income, the elderly, etc.
The Treasury risks “running out of cash to pay hundreds of billions of dollars” in bills, said Nancy Vanden Houten, an economist at Oxford Economics. And “companies that work for the government won’t charge more either, adds Gregory Daco. In addition, “if stock markets fall, (…) people’s savings and retirement savings would be penalized,” Nathan Sheets, chief economist at Citigroup bank, told AFP.
For global markets
“From a financial market standpoint, we would have enormous stress,” Gregory Daco said. In 2011, when the country was on the verge of default, the New York Stock Exchange crashed, with the S&P 500 falling “in the order of 13-14%,” he recalls. What would change everything: the fact that the United States cannot repay Treasury bondholders, the king of global finance.
Will international investors decide to withdraw and not invest anymore?, asks Gregory Daco. “Investors have become more reluctant to hold sovereign debt due in June,” US Treasury Secretary Janet Yellen recently warned.
And, if the price of US bonds collapses, “the situation would be catastrophic for all organizations that have a lot of US-issued government bonds, such as banks, pension funds, insurance companies or mutual funds,” he says. Eric Dor, director of economic studies at the IESEG business school.
With, he stresses, the risk of bankruptcies and “knock-on effects with a new global financial crisis.” As for the dollar, “it would depreciate very strongly,” he points out again. However, the global financial system “depends on the stability of the dollar,” stressed the Center for American Progress in a May 11 note. But, as in 2011, gold could be the big winner: “it’s the safe haven” because in the event of a threat of default, “the dollar will go down, bond yields will go down and stocks will fall,” Jack Ablin. of Cresset Capital told AFP.
for the american economy
“The economic impact comes simply from the fact that the government stops spending,” said Gregory Daco. Household consumption is in fact the engine of the US economy. With a “multiplier effect”, he adds, because lower government spending means “that the family that does not receive their check (…) will not be able to spend the same while shopping, which (…) will affect the store where they shop, which will then affect their own recruiting decisions,…”
In addition, since the government cannot pay its suppliers, “the companies of which the American State is a client would be threatened (…) with bankruptcy,” adds Eric Dor. The cumulative financial and economic impacts could cost the US economy 5% of GDP, estimates Gregory Daco: “We are talking about a more significant impact than the contraction of GDP during the financial crisis. We are talking about a huge impact.”
For the world economy
The effects of a US economic crisis, of course, could spill over to the world. Especially since the interest rates of the “bonds issued by the United States would rise very sharply”, with chain reactions: “fall in business and household investment, as well as consumption, and therefore a strong recession in the United States “, which could spread “in Europe and elsewhere”, anticipates Eric Dor.
“I don’t think global growth or US growth will be affected significantly this year,” Nathan Sheets said. The situation could, paradoxically, benefit certain US exporting companies, since a depreciation of the dollar “would increase foreign demand for their products by effectively making them cheaper,” according to a May 2 Council on Foreign Relations note.
Source: BFM TV
