As the United States hits its debt ceiling, it plunges into uncertainty

As the United States hits its debt ceiling, it plunges into uncertainty

The United States debt ceiling reached on Thursday, which obliges the American Treasury Department to take austerity measures to ensure it can meet its financial obligations, has become the subject of disputes between the Democratic administration and the new Republican majority in the House of Representatives.

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In a letter sent Thursday to Republican House Speaker Kevin McCarthy, Treasury Secretary Janet Yellen announced the implementation of “extraordinary measures” while hitting the maximum debt ceiling, currently set at more than $31 trillion , before being amended by Congress.

The first measures concern the suspension of payments to several pension funds and sickness or disability benefits for civil servants, technical adjustments “not directly necessary for the payment of pensions”.

At the same time, “a period of debt issuance suspension” has begun, which will last until June 5, Ms Yellen added.

These measures allow the US government to look forward, but may only be temporary, and if Congress fails to reach an agreement, the United States could eventually find itself in a default situation.

“Failure to meet government obligations would irreparably damage the US economy and the livelihoods of all Americans, as well as global finance,” Yellen said Jan. 13.

The markets reacted little to the announcement, the indices lost – from the start of trading downwards – at the end of trading 0.76% for the Dow Jones and 0.96% for the Nasdaq.

The 10-year Treasury bills, the benchmark, expanded slightly to 3.39% from 3.36% the previous day.

“Everyone expects this to be over by the summer, but right now it’s not really going to move the markets,” said Ed Moya, an analyst at Oanda.

Liar Poker

The White House stressed on Friday that in normal times the Republicans and Democrats-elect work together on the matter “and it is necessary” but without any negotiations on the issue.

A way to shift the blame for a possible failure to Republicans, who have made no secret of their intention to use the cap issue as a bargaining chip to receive plane strikes on funding plans agreed in the first half of President Joe Biden’s term.

But they want even more to push through their own economic program, which envisages new tax cuts and cuts in government spending.

“Imagine you give your kid a credit card that regularly hits the cap, so you increase it and so on. Do you eventually continue like this or do you try to change his behavior? ‘ Mr. McCarthy described to the press.

“Congress cannot continue to mortgage the futures of our children and grandchildren on loans from foreign countries like China,” said Republican Jason Smith, chairman of the House Ways and Means Committee.

Senate Majority Leader Chuck Schumer said in a statement, “If Republicans stop paying our nation’s bills, Americans will suffer the consequences.” A political escalation of debt would be a major blow to the local economy.”

“Holy” solvency

JPMorgan Chase CEO Jamie Dimon told CNBC that “the US government’s solvency shouldn’t be an issue. It’s sacrosanct, it must never happen.”

If raising or suspending the debt ceiling is an issue that comes up regularly, with 79 interventions since 1960, it is occasionally an issue of political tension between the two parties.

In 2011, opposition between the Republican majority in Congress and the Democratic administration of Barack Obama was so great that rating agency Standard and Poor’s downgraded the United States’ long-term debt rating, a first that rocked financial markets.

In 2021, the very thin Democratic majority in Congress and the Republican opposition collapsed several months before reaching an agreement.

In early August, Janet Yellen announced the implementation of “extraordinary measures” to deal with the situation in a letter to former Democratic Party “spokeswoman” Nancy Pelosi.

Congress finally agreed to raise the ceiling just after midnight in December, the same day that would have forced the Treasury Department to take additional measures with a more direct impact on the US economy.