American correspondent Jan Postma calls it special that Biden is talking to McCarthy. It is the first time since February that they have spoken directly. Before that, everything went through the media and they didn’t exactly come close, as time was running out.’ And that clock is running fast towards June 1, the day when the debt ceiling is likely to be reached. So the money is gone and the US can no longer pay interest on debts and take on new ones, among other things. Technically, that means US bankruptcy.
“You can already see the turmoil in the money markets”
US strategist Philip Marey of Rabobank foresees dire consequences if it comes to this. “In the money market, interest rates are rising dramatically on short-term loans to the government. The government has to make a lot of effort to lend money for a month, because it’s right around the deadline. Investors therefore fear not recovering their money. So you can already see the turmoil in the money markets.’
House of cards
Postma compares debt ceiling talks to Netflix series House of Cards. “This is a game of political poker where both sides try to blame each other and put pressure on the other. McCarthy has already done so by passing a plan in the House that has only gained Republican support.
In that plan, the debt ceiling is raised, but in return there are big cuts. Notably, there will be cuts to the floors Democrats and Biden want to profile themselves on. For example, the plan will have to be canceled to clear up to $20,000 in student debt from alumni. Republicans also want to reduce the US tax budget.
Republicans also want to sideline the Inflation Reduction Act. The Conservative Party mainly wants to cut energy subsidies and energy subsidies for households. “It’s a real Republican plan that Democrats want nothing to do with,” Postma says.
Suspension of execution
Biden has previously stated that he does not want to go along with Republican plans. “He says it’s not about austerity and the other plans at all, it’s about the debt ceiling.”
Marey also sees the possibility of staying the execution. “If there is not enough time to negotiate, they can also temporarily raise the debt ceiling for a number of months, for example until September. Then they have a few months to negotiate.
The Republicans’ plan may have passed the House, but the cuts don’t appear to be passing in the Senate. No Democrat is going to vote for it, Democrats have a majority there. So we have to negotiate now.’ However, Postma does not expect the negotiations to go smoothly. “We probably won’t hear until just before the deadline that they’re coming out.”