Why the U.S. Could Soon Default on its Debt For the First Time Ever (VIDEO)

Justin Hopper May 10, 2023Last Updated: May 15, 2023

2 2 minutes read

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If Congress still hasn’t addressed the debt ceiling crisis by June 1, 2023, the United States could be set to default on its debt for the first time in the nation’s history.

Despite the political stalemate in Washington over increasing the debt ceiling – the cap on the federal government’s borrowing ability to fulfill its commitments – the stock market has remained mostly stable. However, the cost of credit default swaps, which allow investors to hedge risks associated with U.S. Treasury bonds, has spiked recently. This indicates that investors are unsure of a political solution to the debt crisis, as John Canavan, chief analyst at Oxford Economics, explains.

If the United States were to default on its debt, this could cause a catastrophic domino effect starting with the already struggling banks. Financial experts are growing increasingly concerned as market participants offload Treasury bills and other fixed-income investments that mature in June and July. Treasury Secretary Janet Yellen warned on May 1 that the U.S. might fail to meet its financial obligations by June 1 if Congress does not raise or suspend the debt limit.

Canavan predicts that the Treasury market could experience a “flight to safety” as June approaches, similar to investor behaviour during the 2011 debt limit dispute. Canavan observed in a Monday report that financial markets had weathered previous debt limit confrontations, but this time, political stubbornness is more pronounced as both sides dig in their heels.

The debt limit was reached on January 19, prompting Treasury officials to implement “extraordinary measures” to avert a default. Time is running out, and the House and Senate have only two more calendar weeks this month when both chambers are in session:

Source: Jeff Jackson TikTok

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Failure to raise the government’s borrowing limit may force the Treasury Department to postpone various payments and interest, resulting in a technical default. Even before the U.S. reaches the “X Date” – the day the government can no longer pay its debts – uncertainty surrounding a resolution in Washington could disrupt financial markets.

On Saturday, 43 Senate Republicans signed a letter to Senate Majority Leader Chuck Schumer, pledging to oppose efforts to increase the debt ceiling without significant government spending reductions.

A White House spokesperson responded on Sunday, stating:

“Republican senators are threatening to single-handedly trigger default…this is no time for these senators to reverse their support for avoiding default without conditions.”

Economists warn that a U.S. default on its debt, historically seen as one of the safest assets, could wreak havoc on the economy and have worldwide repercussions.

On Monday, a UBS analyst wrote in a research report:

“An outright default would be a more disruptive event that could spark a sharp sell-off in stock prices. Because a default would be unprecedented, the magnitude of the market decline is difficult to estimate, but we would expect it to be very meaningful.”

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