U.S. President Joe Biden sought to calm global financial market jitters on the looming debt limit weeks before the nation is at risk of defaulting on its financial obligations for the first time in history.
Biden met Tuesday afternoon with Republican House Speaker Kevin McCarthy and Senate Minority Leader Mitch McConnell, as well as Democratic House leader Hakeem Jeffries and Senate Majority Leader Chuck Schumer, in a bid to ensure the government can borrow more money to pay for spending it has already incurred.
“We’re going to get started and solve all the world’s problems,” Biden said as the Oval Office meeting began. He and the other leaders declined to take reporters’ questions ahead of the meeting.
Without a deal between the White House and congressional leaders, the country is estimated to be weeks from default. Earlier, the White House warned that the United States defaulting on its debts would be “a gift” to adversaries, including China and Russia, and would lead to a recession that could send shock waves across the global economy.
“We cannot be a deadbeat nation,” White House press secretary Karine Jean-Pierre said during her press briefing on Tuesday, warning congressional Republicans who are refusing to raise the nation’s debt limit unless it’s paired with spending cuts.
“Default would create global uncertainty about the value of the U.S. dollar and U.S. institutions and leadership, leading to volatility in currency and financial markets and commodity markets that are priced in dollars,” Jean-Pierre said.
Director of National Intelligence Avril Haines previously made a similar point to the Senate Intelligence Committee about the national security consequences of the U.S. teetering on the edge of a fiscal cliff.
But Republicans are urging spending cuts and blame Biden for the impasse.
“The solution is clear. It’s been clear for months,” McConnell said ahead of the meeting. “President Biden needs to negotiate on spending with Speaker McCarthy. The Speaker’s been at the table since February. House Republicans are the only people in town who have passed any bill that prevents default.”
The Treasury debt limit, which caps the amount of outstanding debt the country can have and thus Treasury’s ability to issue securities to fund the government’s obligations, was reached on January 19.
Even with Treasury taking “extraordinary measures” to pay the government’s bills, Treasury Secretary Janet Yellen told lawmakers last week that the department’s ability to pay the government’s bills could run short as early as June 1 — what’s commonly known as the X-date.
Republicans are insisting that the federal government reduce spending before they will agree to raise the debt ceiling. Meanwhile, Biden is adamant that Congress has a duty to pay its bills and that the two issues should be addressed separately.
Ceiling raised many times before
Lifting the debt ceiling was once a routine vote. Congress has raised it 78 times since 1960, 29 times under Democratic presidents and 49 times under Republican presidents, including three times under former President Donald Trump.
How would a U.S. default affect the world?
The U.S. economy is the largest in the world, and the U.S. dollar is considered the world’s reserve currency, meaning that many countries’ central banks and other monetary authorities hold U.S. dollars as part of their foreign exchange reserves as a backup in case their own currency fails.
A debt event in the United States would have serious consequences not only for the U.S. but also for the global economy and for world financial markets.
Should the U.S. fail to pay its debts, in addition to creating havoc in global stock markets and sending the American economy into recession, it would trigger a sell-off in U.S. Treasury bonds, weakening the dollar and raising interest rates. This would affect foreign currency reserves held by other countries and make the costs of borrowing more expensive, potentially leading countries with already high levels of borrowing into a debt crisis.
“If interest rates in the United States go up, it’s going to take all other interest rates up with it. It’s going to make all other risk assets look very shaky,” said Desmond Lachman, former deputy director at the International Monetary Fund and now a fellow at the American Enterprise Institute.
Lachman agreed with Yellen that a U.S. debt default would be an economic catastrophe that must be avoided.
Lachman told VOA the world can ill-afford such financial turbulence, especially with the regional banking crisis that began with the collapse of Silicon Valley Bank in March, followed by the toppling of two other U.S. banks — Signature Bank and First Republic.
U.S. Treasury bonds are traditionally considered the safest investment that global financial investors turn to in times of distress, said Heidi Crebo-Rediker, former chief economist of the U.S. Department of State and adjunct senior fellow at the Council on Foreign Relations.
“It is the deepest, most liquid, solid and reliable market in the world,” she said.
Crebo-Rediker added that countries and investors need not be overly concerned about an actual U.S. default.
“This is a question of willingness to pay, not ability to pay,” she said. “And that is a very big distinction.”