If the United States defaults on its debt, the results for the global economy would be catastrophic. Here are five things to know about the U.S. debt ceiling crisis now playing out in Washington.
What is the debt ceiling crisis?
U.S. officials warn that if the government is unable to raise the amount of money it can borrow, the country will be unable to pay all its bills. If that happens, the results would not only be catastrophic for the U.S. economy but for the global economy.
The U.S. Treasury says that by October 17 the government will exhaust its ability to stay beneath the current $16.7 trillion federal debt ceiling, which is fixed by law, and would have only about $30 billion left in cash. That's not enough to keep up payments of salaries and social benefits at home, plus interest due on trillions of dollars borrowed internationally.
That would be an unprecedented situation. The United States hasn't defaulted on its debts since 1790, when it was a newly formed country. Today it is the world's strongest economy, with trade and investment ties to virtually every other country, and no state of that economic status has ever defaulted on its debts before.
But whether the United States' two political parties -- President Barack Obama's Democrats and the opposition Republicans -- can agree on letting Washington borrow more money to pay its bills is an open question.
The Republicans say they are ready to raise the debt ceiling after they negotiate with the Democrats over how to reduce the amounts the government spends for social programs. But the Democrats say they will negotiate only after the ceiling is raised because negotiating beforehand would put them under intolerable pressure.
That leaves the two sides in a showdown where neither wants to concede to the other. At the same time, both say they won't let the government default.
What would be the impact on the global economy if Washington defaulted?
Among the first to feel the impact would be foreign countries, institutions, and market funds that have bought U.S. Treasury bills as a safe way to keep money and earn interest.
"If there were an outright default on Treasury [bill] obligations, there is no doubt that would create huge chaos in financial markets," says Ethan Ilzetzki, a professor of economics at the London School of Economics. "For one thing, these assets are used as reserves by many private banks, by many central banks, and if their value suddenly plummeted it is hard to fathom the exact implications of that."
Here are just some of the implications:
International rating agencies would automatically downgrade the creditworthiness of banks holding U.S. Treasury debt, making it harder, in turn, for those banks to borrow the money they need to keep operating.
Banks with reduced assets would dramatically decrease the amount of money they lend, leading to a freeze in credit available to businesses worldwide.
The value of the suddenly-less-desirable dollar would plummet, throwing into disarray the prices of dollar-pegged global commodities like gold and oil.
And the economies of the United States and those countries closely tied to it would slow down and possibly slide into recession.
The two countries that hold the most U.S. debt, Japan and China, have signaled real alarm over the possibility of a debt default. Officials in both Tokyo and Beijing have warned of market turmoil and chaos if Washington cannot find a quick resolution to the crisis.
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