Business News/ News / World/  Will US run out of cash after 1 June? here's all you need to know

US President Joe Biden and Republican House Speaker Kevin McCarthy held a sit-down meeting to discuss raising the country's debt ceiling, which limits how much the US federal government can borrow to pay its accounts. Though the two have called their latest talks productive, however, no deal has yet been reached.

It's a crucial moment for the Democratic president and the Republican speaker, just 10 days before a looming deadline to raise the debt limit.

"I believe we can get a deal done, “House Speaker McCarthy told reporters after the meeting, adding that, “We don't have an agreement yet." "But I did feel the discussion was productive in areas that we have differences of opinion. Biden and I will talk every day until we get this done," he said.

Issuing a statement, Biden said, “I just concluded a productive meeting with Speaker McCarthy about the need to prevent default and avoid a catastrophe for our economy. We reiterated once again that default is off the table and the only way to move forward is in good faith toward a bipartisan agreement."

"While there are areas of disagreement, the Speaker and I, and his lead negotiators Chairman McHenry and Congressman Graves, and our staffs will continue to discuss the path forward," he added.

Treasury Secretary Janet Yellen said it’s now “highly likely" that her department will run out of sufficient cash in early June, and repeated her warning that the moment could come as soon as June 1.

In a letter to lawmakers, she said, “I am writing to note that we estimate that it is highly likely that Treasury will no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1." A week ago, Yellen had said it was “likely" the Treasury would exhaust its special accounting measures to stay within the debt limit by early June.

Borrowing costs

Yellen said the Treasury’s timeline estimates are based on currently available data, and she would “continue to update Congress as more information becomes available." By May 17, the Treasury had used up all but $92 billion in space created under the debt limit through special accounting measures. As of May 18, the Treasury’s cash stood at $57.3 billion.

Last week, Goldman Sachs Group Inc. economists estimated that the Treasury would reach a key threshold by June 8 or 9, when cash levels drop below the $30 billion minimum that the department is thought to have. Default could happen at any point thereafter, according to the authors.

When does a debt default occur?

A country is considered in a payment default when it does not meet its financial obligations such as to another country, or to investors who bought its bonds. A default is considered partial when a country fails to repay just a portion of its debt, and a government can declare itself in default by announcing it will not repay its debt.

A ratings agency can also announce a default, after the end of an automatic 30-day grace period following the payment due date. Or, a private borrower can say publicly that a country has not paid up.

Impact of default

Wendy Edelberg, senior fellow in economic studies at the Brookings Institution said An outright default on Treasury securities would "very likely result in severe disruption to the Treasury securities market with acute spillovers to other financial markets. It would also impact the cost and availability of credit to households and businesses.

As per Associated Press report, the repercussions of a first-ever default on the federal debt would quickly reverberate around the world. Orders for Chinese factories that sell electronics to the United States could dry up. Swiss investors who own US Treasurys would suffer losses. Sri Lankan companies could no longer deploy dollars as an alternative to their own dodgy currency.

Mark Zandi, chief economist at Moody’s Analytics said that “No corner of the global economy will be spared" if the US government defaulted and the crisis weren’t resolved quickly.

Zandi and two colleagues at Moody’s also concluded that even if the debt limit were breached for no more than week, the US economy would weaken so much, so fast, as to wipe out roughly 1.5 million jobs.

If a government default were to last much longer, the consequences would be far more terrible. As per Zandi and his colleagues analysis, US economic growth would sink, 7.8 million American jobs would vanish, borrowing rates would jump, the unemployment rate would soar from the current 3.4 percent to 8 percent and a stock-market plunge would erase $10 trillion in household wealth, AP has reported. 

According to Bloomberg Economics, the current standoff over the debt ceiling has the potential to put more strain on the US economy, which is already vulnerable to a recession after a series of interest-rate increases by the Federal Reserve. Republicans are demanding over USD 4 trillion in budget cuts which would dissolve several of Biden's legislative priorities. Democrats have refused and instead are offering to keep spending flat.

(With inputs from agencies)

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Updated: 23 May 2023, 01:02 PM IST
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