US default concerns raise recession risk

As markets closely watch what could happen if the debt crisis that rocked the US drags the country into recession, it is argued that if the US government defaults and the crisis is not resolved quickly, it will not no point will be left unscathed in the economy. especially the stock market and employment.

While there is still no deal in debt limit negotiations, with the US federal government running out of cash hitting the $31.4 trillion debt limit, analysts say a long-term default may As the US economy deepens, where unemployment is rising, access to credit is diminishing, and losses may occur in the stock market, it warns that it will plunge into a recession.

‘IT CAN DAMAGE THE GLOBAL ECONOMY’

It is also warned that a possible US default will cause great damage to the world economy by triggering instability in the global financial system based on US bonds.

While the US Treasury reiterated its warnings that the country would not be able to make its payments before June 1 if the debt limit is not raised, weeks of debt limit negotiations between the White House and Republicans They have not yet reached an agreement.

The debt limit, which has become a problem many times in the country’s history; At a time when interest rates are rising due to high inflation, recession expectations are stronger, welfare benefits are expanding, and US Treasury borrowing costs are rising, it carries more risk than ever.

Economists point out that even waiting until the last minute to raise or suspend the debt limit can seriously damage business and consumer confidence, increase borrowing costs, and negatively affect America’s credit rating.

IF THE DEBT LIMIT IS EXCEEDED, THE GOVERNMENT CANNOT PAY THE BILLS

The US Treasury generates revenue from taxes and “pays the bills” every day, from Social Security benefits to utilities. In the event that the expenses exceed the income and cannot increase the indebtedness due to the indebtedness limit, the expenses can only be satisfied to the extent that there is cash inflow.

It is claimed that if the borrowing limit is not increased and a series of cash-saving instruments known as extraordinary measures are depleted, the US Treasury may find it difficult to meet its expenses by not being able to make new loans.

It is warned that the treasury, which will not be able to meet all its obligations, will have to choose which payments to make.

US debt service is also in trouble, and if the country cannot meet its financial obligations, it is at risk of default.

Programs that could affect nearly every American, from Social Security to healthcare, may not be paid.

While the US Treasury Department has the ability to prioritize certain debt obligations, such as interest and principal payments, a sudden shortage of cash flow could force the federal government to miss or delay critical payments.

It should be noted that these payments can include programs that can affect almost any American, such as Social Security, Medicare (federal health insurance for people age 65 and older), Medicaid (federal health insurance for people with low incomes), military and federal wages. , and benefits for veterans.

It is claimed that the lack of federal payments can create a heavy burden on many segments, from businesses to retirees across the country.

IT CAN INCREASE UNEMPLOYMENT, HARDER ACCESS TO CREDIT

Analysts warn that exceeding the debt limit will severely damage the US economy. Even the current uncertainty about the debt limit is putting pressure on investors and stocks.

According to Moody’s credit rating agency, even exceeding the debt limit for less than a week could result in a decline in real GDP, the loss of nearly 2 million jobs, and an increase in the unemployment rate to about 5 percent from the current 3.5 percent. .

It is claimed that this situation may lead to higher interest costs. It is claimed that rising interest rates will make it more difficult for Americans to buy a house, a car or borrow money to start a business.

Analysts point out that if the borrowing limit is exceeded for a long time, the cost to the economy will be even greater.

In such a situation, the growth rate of the US economy can be expected to bottom out and, as a result, about 8 million Americans will lose their jobs, credit and debt ratios would rise sharply, and the rate of Unemployment would rise to about 8 percent from the current level of 3.5 percent. With the sharp fall in the stock market, a fortune of 10 trillion dollars can be erased.

‘THE ECONOMIC COSTS WILL BE VERY BIG’

Ryan Sweet, chief US economist at Oxford Economics, told the AA correspondent that if the debt limit is exceeded for a few weeks, the economic costs will be huge.

Sweet said: “Exceeding the debt limit for too long will cause a sudden tightening of financial market conditions, reduce consumer and business access to credit and drag the economy into recession. Therefore, non-farm employment will decrease and the unemployment rate will increase significantly.

Noting that this will trigger a vicious cycle in which rising unemployment reduces consumer spending and leads to more layoffs, Sweet also asserted that fiscal policy will be constrained to handle the recession with all the burden falling on the US Federal Reserve. US (Fed ).

Sweet said that the fall in stock prices will also reduce household wealth, adding that confidence will deteriorate and this may negatively affect consumer spending. (AA)