U.S. averts first-ever default with 11th-hour debt deal

Subject: Economy

Section: External Sector

Concept :

S. senators have voted to temporarily suspend the federal debt limit, averting the risk of a credit default just days before the Treasury deadline.
Economists had warned that the country could face a shortage of funds to pay its bills by June 05, 2023, highlighting the urgency to pass the Fiscal Responsibility Act.
This legislation extends the government’s borrowing authority until 2024 while reducing federal spending.
The bipartisan agreement, reached between President Joe Biden and the Republicans, secured a majority of 63 votes to 36 in the Senate, following a smooth passage in the House of Representatives.

US debt ceiling

The debt ceiling is the amount of money the US government is allowed to borrow to pay the nation’s bills.
In the United States, Congress comprising the House and Senate approves the budget and funds for the Executive branch to run the country.
The issue of the debt ceiling arises from the fact that the United States has been running a fiscal deficit since 2001.
There is a limit to that borrowing which is periodically increased to allow the government to borrow more and continue working.
If the debt ceiling is not increased or suspended, the government would not be able to borrow and pay its outstanding dues.
So far, such a situation has happened only once in 1979 from an accounting error and not a political crisis.

Impact of possible US default:

A default by the US on its debt would have devastating consequences for the economy. According to Moody’s Analytics, even a breach of the debt limit for just one week would lead to a rapid and severe weakening of the US economy, resulting in the loss of approximately 1.5 million jobs.
The United States would experience an economic downturn, accompanied by significant volatility in the stock markets.
A prolonged default could have severe repercussions, potentially destabilizing the $24 trillion Treasury debt market, leading to a freeze in financial markets, and triggering an international crisis.
Of all the foreign exchange reserves held by the world’s central banks, US dollars account for 58 per cent.
Researchers at the Federal Reserve have calculated that from 1999 to 2019, 96 per cent of trade in the Americas was invoiced in US dollars. So was 74 per cent of trade in Asia. Elsewhere outside of Europe, where the euro dominates, dollars accounted for 79 per cent of trade.
A rising dollar can trigger crises abroad by drawing investment out of other countries and raising their cost of repaying dollar-denominated loans.

For further reference – https://optimizeias.com/united-states-debt-ceiling-crisis/