Three scenarios for the US debt crisis from economists

While the protracted dispute over the debt ceiling could push the US economy into recession, a government failure to meet its obligations could lead to a severe financial crisis.

As US politicians continue their negotiations to raise the debt ceiling, the country could default on June 1 if no deal is reached.

Treasury Secretary Janet Yellen said the government may not be able to pay bills on time before June 1. In this case, the Treasury Department may withhold many payments, such as payments to federal employees or veterans.

In the worst case, a default on US government debt could trigger a severe recession, causing stock prices to fall and borrowing costs to skyrocket.

Economists consider the debt ceiling crisis in three possible scenarios. These scenarios are based on a last minute deal, a deal after the deadline, and a no deal.

LAST MINUTE AGREEMENT

Many experts expect a recession this year as the US economy slows due to rising interest rates.

Joel Prakken, chief US economist at S&P Global, said uncertainty as the debt ceiling continues; He said it makes consumers, investors and businesses save and increases the risk of recession.

Although it is not considered a possible possibility of workers losing their jobs if a last-minute agreement is reached, it is thought that it can cause delays in the hiring processes.

On the other hand, stocks are likely to fall as June 1 approaches. Regarding stocks, Prakken said stocks fell in 2011 when Congress raised the debt ceiling in the last few hours and it took months to recover. He later said the country’s credit rating was downgraded.

“Even if we reach an agreement before we run out of resources, uncertainty can have a negative effect on economic growth,” Prakken said.

S&P Global had lowered its growth forecasts for the US economy for 2023 and 2024, pointing to the risk that failure to raise the debt ceiling could lead to default and banks tighten credit conditions. Consequently, while the US 2023 GDP growth forecast was lowered from 1.4% to 1.2%, the 2024 GDP growth forecast was lowered from 1.5% to 0.9 %.

IF THE AGREEMENT IS MADE AFTER JUNE 1…

Economists expect a tougher response from financial markets as the probability of default looks more realistic if negotiations take place after Thursday June 1.

“The shock will tend to accelerate quite quickly,” Ernst & Young chief economist Gregory Daco said on June 1. Spending in the US is forecast to fall sharply if the deal is done after the payment deadline, while companies are thought to suspend their hiring and investment plans.

Another possibility is that the government could prioritize debt payments for a short period of time, leaving behind other payments such as social security benefits. UBS economists say this would have a less serious economic impact than a debt default.

In the case of this scenario, GDP is expected to contract 2 percent annually in the third quarter and fall further in the fourth quarter, while employers are expected to lay off 250,000 jobs in the second half.

On the other hand, in this scenario, there is a chance that inflation will come down, as the Federal Reserve wants, and the Central Bank will lower interest rates to help offset some of the economic weakness.

WHAT HAPPENS IF THE SETTLEMENT FAILS?

If an agreement is not reached, the repercussions of the government’s failure to pay payments for days or weeks are expected to be enormous.

Ernst & Young economist Daco said a default would trigger a recession more severe than the 2007-2009 crisis, while Brookings Institution economist Wendy Edelberg said there would be chaos in the global financial system.

Without a deal, the global flow of trillions of dollars in short-term dollar loans, which is critical to the way banks and businesses finance operations, could be disrupted. Mutual funds, companies and banks can lose value, which can affect balance sheets.

Furthermore, analysts say that many investors will avoid any risky assets. According to a White House report, the stock market will fall 45 percent and unemployment will rise 5 percentage points in the coming months, but unlike the 2020 Covid-19 recession, where the government has poured trillions of dollars into stimulus, Washington will not be able to offer support.

UBS, on the other hand, says that a month-long stagnation will see the economy contract for four quarters in a row, while rates are likely to rise as Treasury yields hit interest rates. In this case, consumers; You may have to pay higher interest on credit card debt, mortgages, and car loans.