All eyes on US Congress as world’s largest debtor lurches toward default

The US could hit its debt ceiling by 1st June 2023, a situation which would send shockwaves across the global financial system.

What’s the problem?

The US Government is poised to hit the limit of how much money it can borrow to finance its budget. The current debt ceiling was last raised in 2021 to $31.4 trillion (€29.1 trillion), and if it’s not increased within a few days, the country could default on its debt.

This means that the Government is no longer able to borrow money to finance its budget. As the global reserve currency, it would have a worldwide ripple effect – the full scale of which is not yet known, since this has never happened before.

However, experts believe that it would lead to irreparable damage of the US economy, destabilise the global economy, and plummet investor confidence in the US dollar.

A uniquely American situation

The US is the only country which has a debt ceiling.

The only way it can increase it is if Congress first passes a bill specifically addressing the debt ceiling. This means both the House of Representatives (which has a slim Republican majority) and the Senate (which has a slim Democrat majority) reach an agreement.

Then, the President has to approve the bill. Once this takes place, the US Treasury can implement it.

Other countries do not have strict limits on how much debt they could take on. While this can be seen as a safeguard against taking on excessive debt, the US debt-to-GDP ratio is roughly 129 per cent, more than double of what would be allowed within the eurozone.

Will the US default?

US President Joe Biden has repeatedly reiterated that default is off the table, however he’s taking a firm stance against demands by Republicans to cut spending.

Nevertheless, this still shakes confidence in the US dollar. The credit rating of the country fell for the first time in 2011 when The S&P downgraded its credit rating for the US from AAA to AA+ over a failed vote to raise the US debt ceiling.