Foreign investors, including governments and central banks, hold significant amounts of U.S. Treasury bonds, and a default would cause these bonds to lose value, resulting in significant losses for investors. This could lead to a sell-off of U.S. debt, driving up interest rates globally and making it more expensive for governments and businesses to borrow money.
Emerging market economies, in particular, would be at risk, as many of these countries have borrowed heavily in U.S. dollars and would struggle to repay their debts if the value of the dollar were to plummet. A default could also trigger a wave of corporate and sovereign defaults, as well as a sharp drop in commodity prices.
The impact of a U.S. debt default would be felt most acutely in emerging market economies. Many of these countries have borrowed heavily in U.S. dollars and would struggle to repay their debts if the value of the dollar were to plummet. This could lead to a wave of corporate and sovereign defaults, as well as a sharp drop in commodity prices.
Given the potential consequences of a U.S. debt default, it is essential that Congress acts quickly to raise or suspend the debt ceiling. Failure to do so could have catastrophic implications for the U.S. and theglobal economy, potentially triggering a recession and causing far-reaching implications for countries around the world.
The U.S. Treasury Secretary, Janet Yellen, has warned Congress that the U.S. could be unable to “continue to satisfy all of the government’s obligations” by June 1 if Congress does not raise or suspend the debt limit before that time. The warning comes as millions of Americans who rely on federal payments to make ends meet could be negatively impacted if the government is unable to pay its bills.
The first debt default in U.S. history would be an economic catastrophe and could trigger a global financial crisis, economists agree. Allowing the U.S. to default on its debts would induce “a self-inflicted recession,” Gregory Daco, chief economist at EY-Parthenon, wrote in a note to clients.
The global financial system is highly interconnected, and a crisis in one country can quickly spread to others. Therefore, it is in the interest of all countries to ensure that the U.S. does not default on its debts. The U.S. dollar is the world’s reserve currency, and a default could lead to a loss of confidence in the dollar, causing significant disruptions in financial markets around the world.