The CBO’s latest report on US debt confirms the X-date of default for the debt ceiling crisis ahead of the G7 meeting next week.
According to a report released by the US Congressional Budget Office on Friday, if the debt limit remains unchanged, then there is a significant risk that at some point in the first two weeks of June, the government will no longer be able to pay all its obligations. The CBO’s report further reinforces the prediction given by Treasury Secretary Janet Yellen several times earlier, regarding an early June default deadline or X-date. The US debt ceiling crisis is expected to be an important part of the upcoming G7 meeting in Japan, and the ongoing G7 finance ministers’ meeting.
CBO’s Report
The CBO, which is responsible for producing independent, non-partisan analyses of budgetary and economic issues to support the congressional budget process, stated in its report that if the debt limit is not suspended or raised and the extraordinary measures are exhausted then the government will have to default on its payments and debt obligations, for the first time in US history.
Until lawmakers enact legislation regarding the debt limit, the Treasury must use its cash balance and available extraordinary measures. As of April 2023, the treasury’s cash balance stood at USD 316 billion. Extraordinary measures include suspending government investments, suspending the issuance of new securities, and postponing reinvestment of government securities.
Over the coming weeks, the size and frequency of government cashflows and transactions will determine when the extraordinary measures of the treasury will be exhausted. These include interest payments, social security payments, and payments to members of the military, civil service, and veterans.
The government’s financing needs will also be an important factor. If the financing needs totaled less than USD 300 billion before June 15, then the treasury could continue to sustain the government’s debt obligations till at least the end of July, the CBO estimates.
If the debt limit is not raised or suspended, the CBO concludes, then the treasury would not be able to issue more debt, which would lead to delayed payments on government securities, this could lead to distress in the credit markets and a rapid increase in interest rates, leading to massive economic disruption.
International Response
The international community has also expressed concern over the debt ceiling crisis in the US.
World Bank President, David Malpass said that a default by the US would add more problems to the slowing global economy. Everyone would find distress in the world’s biggest economy as negative; he said in an interview with Reuters.
At the G7 finance ministers meeting, going on in Niigata, Japan, the US debt ceiling crisis is an important issue. Secretary Yellen, participating in the meet, is expected to restore the confidence of the member countries at the meet. The issue is also expected to crop up during the G7 meeting which will be attended by President Joe Biden on May 19 to 21.
The German Finance Minister Christian Lindner, has said that the economic outlook is still fragile and hopes that US lawmakers will come to a “grown-up” decision. JPMorgan has also begun convening a weekly war room, to prepare for a potential default by the government.
Debt ceiling crisis
The US debt ceiling crisis has emerged as a result of differences between the Republicans and Democrats. Republican Speaker Kevin McCarthy has demanded negotiations regarding federal spending cuts in return for an increase in the debt ceiling. The spending cuts he demands include cuts to Social Security and Medicare among others. However, President Biden has sharply refused, stating that the debt ceiling must be raised with no strings attached.
The two leaders along with other members of Congress met earlier in the week to discuss the issue. Further meetings are scheduled for next week.
