ANALYSIS - Warnings Of US Crisis Over Debt Ceiling Rise Warranted, But Default Unlikely

ANALYSIS - Warnings of US Crisis Over Debt Ceiling Rise Warranted, But Default Unlikely

Fears of the United States defaulting on its debt payments amid ongoing talks to raise the government's borrowing limit are justified, but a debt crisis in the country is unlikely to materialize since the ceiling is usually raised, experts told Sputnik

MOSCOW (UrduPoint News / Sputnik - 12th July, 2019) Fears of the United States defaulting on its debt payments amid ongoing talks to raise the government's borrowing limit are justified, but a debt crisis in the country is unlikely to materialize since the ceiling is usually raised, experts told Sputnik.

On Thursday, the US treasury released a monthly report stating the US budget deficit increased by 23.1 percent to $747.1 billion in the first nine months of the fiscal year compared with the same period a year ago, warning it could run out of borrowing authority and at a significant risk of defaulting on US debts.

Earlier this week, a new forecast by the Bipartisan Policy Center warned that the US federal government faced a potential default as early as in early September due to lower than expected tax revenues.

At present, Washington is already taking extraordinary measures to avoid a default, such as transfers within the government, but such savings would not be long-lasting and require the United States to speed up budget talks.

"The Bipartisan Policy Center's warnings are warranted - the crisis is real even if not yet perceived as such by the public, Congress, or the Administration. The Congressional Budget Office (CBO) also believes the Treasury will not be able to fund the government past September unless the debt ceiling is raised," Brian Gendreau, Clinical Professor of Finance at the University of Florida, told Sputnik.

According to the expert, the US government was performing "a shell game" which would still leave the government with no choice but to delay payments or suspend debt service, unless the borrowing cap is lifted.

"If Congress fails to lift the debt ceiling, the Treasury would be forced to limit payments to the amounts received in revenues. Given that the government has been running a deficit, with no surplus in sight, this means that the Treasury would have to suspend payments on contracts, delay the payment of employees' salaries, and possibly delay or reduce payments on entitlement programs (Social Security, Medicare, and the like)," Gendreau explained.

Although budget debates would put in question the US creditworthiness and could lead to a potential economic downturn, the US Treasury would make every effort to service the government's debt, the professor added.

"The US government pays on its debt regardless, for two reasons. One, the Constitution says very clearly that it must do so (14th amendment, second section if I recall correctly). Two, there is no mechanism at the Treasury to stop issuing the interest payments that are due, and automatically programmed according to law. So the payments will go out whatever happens to the debt ceiling," James Galbraith, a professor at the Lyndon B. Johnson School of Public Affairs and Department of Government at the University of Texas at Austin, told Sputnik.

DEBT CEILING LIKELY TO BE RAISED AGAIN

Nevertheless, based on results of past disputes in the United States over raising the US federal debt limit, the government would do its best to avoid a default and lift the cap again.

"Congress will eventually raise the ceiling the consequences of not doing so are too dire though possibly not without some brinkmanship and disruption beforehand," Gendreau argued.

Due to the fact that Washington's debt continues to grow, "the ceiling has to be raised periodically," Galbraith agreed.

The expert also doubted that the current debt crisis would ever lead the United States to an actual default.

"There is also no economic basis for any fear that the US government would 'default' on its debts, since the debts are owed in money issued by the US government itself. This is of course different from the situation of governments that cannot borrow in their own currency or those that have to borrow in a currency -- the case of the euro -- that they cannot control," Galbraith argued.

In a worst-case scenario, if the flow of interest payments was ever interrupted, debt holders would accrue the interest due, even if "at a very minor loss," the American economist assured.

Both experts agreed that the US government would eventually lift the US debt ceiling again, but potentially missing the early September deadline, as the US House of Representatives leaves for a six-week summer vacation in three weeks.

Indeed, on Tuesday Senate Majority Leader Mitch McConnell expressed confidence that Republicans and Democrats controlling the two chambers of Congress would cooperate in agreeing to raise the US national debt level again in order to avoid a federal government default.

Your Thoughts and Comments