What Happens If The U.S. Defaults On Its Debt?
What Happens If The U.S. Defaults On Its Debt?
Last Updated: 9-28-21 First Published: 9-27-21
Treasury’s systems simply may not handle a default
As Washington teeters closer to a possible government shutdown at midnight Thursday, here’s why the status of the nation’s debt ceiling may ignite more worry in financial markets. Sept. 30 marks the end of the federal government’s fiscal year, and the deadline for Congress to pass a funding measure. The debt ceiling, which is the amount of money lawmakers authorize the Treasury Department to borrow, must be suspended or raised by Oct. 18, according to Treasury Secretary Janet Yellen, or the U.S. likely will default on its debt.
It’s important to note that no one knows precisely when the U.S. Treasury will run out of money to pay its bills, including bondholders, let alone what would happen next. U.S. sovereign debt generally has been considered the safest and most liquid to own in the world, and all kinds of financial market products and processes have been pegged to the orderly functioning of the nearly $21 trillion Treasury market.
Still, after a couple of topsy-turvy years in which the previously unthinkable became real, some Washington and Wall Street professionals have been girding for a worst-case scenario.
“I see it as an exceedingly slim chance, although with all the theatrics, the possibility has been ramped up,” said Ben Koltun, director of research for D.C.-based Beacon Policy Advisors. “If it does happen, it turns a manufactured political crisis into an economic crisis. The full faith and credit of the U.S. would no longer be full.”
The stalemate on Capitol Hill right now is over a $3.5 trillion spending package.
Will the U.S. run out of money?
In a research note published Sept. 22, Barclays analyst Joseph Abate noted there’s additional uncertainty over the debt ceiling now because it coincides with a funding package Congress needs to pass. What’s more, changes brought by the pandemic have made it far more difficult to assess the state of the Treasury Department’s expected payouts and inflows.
While most analysts expected a mid-October “X date,” when Treasury will run out of money to pay bills, Yellen on Tuesday told Congressional leaders that it would be Oct. 18. “At that point, we expect Treasury would be left with very limited resources that would be depleted quickly,” she wrote in an update.
Beacon’s Koltun, among others, thinks markets will start to get antsy even earlier than that.
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