Quick Bites | US govt debt ceiling calls around again
May 15th, 2023 | Article
By: Paul Zwi
US Government Default Risk? In case you missed it, the debt ceiling debacle is once again coming back onto the macro-market horizon. For those too young to remember, the last time this was a major issue was in 2011 when it became such a problem that S&P downgraded the US sovereign credit rating.
If the debt ceiling is reached, and the US Treasury cannot pay its obligations, the negative economic effects would be catastrophic and risk triggering a deep recession.
The debt limit caps the total amount of allowable outstanding US Federal debt. The US is expected to hit that limit ($31.4 trillion) in June. Of course, the raising of the debt limit is an exercise in the most partisan of political grandstanding, and any reasonable legislator would pass the necessary bill. The US, however, is awash with toxic politics and nothing should be taken for granted.
The effects of a government shutdown would be tremendously negative, although there is uncertainty surrounding how much damage the US economy would incur. It would depend on how long the situation lasts, how it is managed, and the extent to which investors alter their views about the safety of US Treasuries. An extended impasse would cause significant damage, however, this remains at this stage a low probability.
The costs of insuring against a default by the US Government are going through the roof. Credit default swaps (CDS), which reflect these risks, have soared.
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