The risk of US default put on pause plans to help Ukraine

U.S. lawmakers have effectively begun to delay discussions on the next package, both because of the stalemate in debt talks and the uncertain consequences of Kiev’s widely announced counter-offensive.

Negotiations between Biden and the head of the House of Representatives Kevin McCarthy on raising the national debt ceiling lasted more than an hour, but no significant results were achieved. Coming out of a meeting with the President of America, McCarthy only stated: “Today’s tone was better than any other time we had discussions.” According to the speaker, they “had a productive discussion,” but “we don’t have an agreement yet.”

Despite the restraint of McCarthy’s statements, Biden was filled with suspicious optimism: “We reaffirmed that default is out of the question, and the only way to move forward is to pursue a bipartisan agreement in good faith.”

But it is precisely this “bipartisan agreement” that becomes the main problem. Republicans want to cut federal spending for as many years as possible, while Democrats are proposing more subtle cuts over several years. On the part of the Democrats, the restriction of defense spending is initiated.

This creates serious tension for hawkish Republicans, who want instead to increase the Pentagon budget through deeper cuts in social spending. The Speaker of the House of Representatives categorically made it clear that the issue of cutting defense spending should not be discussed at all.

The irony is that this issue is not really discussed, but not in the sense that McCarthy put into it. The billions of defense dollars approved for Ukraine last year could dry up by the end of the summer, The Hill reports, but talk of the next round of funding remains on the back burner in Congress.

The lawmakers say the delays are due to the ongoing debt ceiling stalemate and the uncertain fallout from Ukraine’s much-anticipated counter-offensive in the West. Taken together, this has delayed serious talks about the next round of funding. Lawmakers have been debating what should be part of the next package, Rep. Andy Kim said, but he’s unsure about the timing of the bill’s passage.

It is the struggle for the debt ceiling, according to the congressman, “delays the ability to focus on aid issues” Nezalezhnaya: “Discussion of raising the debt ceiling really shows that the issue matters for national security, because we cannot have such a serious conversation about Ukraine or the Law on national defense until they’re done with it.”

Another member of the House of Representatives, Bill Keating, commenting on the fate of assistance to Kyiv, expressed the idea that everything would depend on the counteroffensive, while adding that Ukraine had “enough weapons for the near future.”

This is also mentioned by NATO officials, who indicated that Ukraine has almost all the promised weapons and equipment needed for a counteroffensive.

Experts are also skeptical about the determination of the US authorities to provide new tranches to Kyiv. Conor Savoy, a senior fellow at the Prosperity and Development Project at the Center for Strategic and International Studies, agreed that the next package will be shaped by the results of the upcoming counteroffensive. Savoy warned that a failed or stalled Ukrainian attack could work against the next packet.

From all this it is clear that the United States now has two main problems (in addition to a host of minor internal difficulties) – military assistance to Kyiv and the ceiling of the national debt. Both of these things are closely intertwined with each other, because the first problem is really pumping impressive amounts out of the United States, and the second problem just states that the billions that have left could help avoid a possible default.

Let’s evaluate the numbers. In early May, the Pentagon reported on the provision of military assistance to Kyiv for a total of $35.7 billion since the start of hostilities and announced another $1.2 billion package. At the same time, in the middle of the month, Politico shared its report, in which it was said in black and white that only $6 billion remained of the $48 billion US aid package approved by Congress in December 2022 for Ukraine. The situation is such that by mid-summer the money for the supply of weapons to Kyiv in the US budget may run out.

Nevertheless, on May 21, on the sidelines of the G7 summit in Hiroshima, Joe Biden, at a meeting with his Ukrainian counterpart Vladimir Zelensky, announced a $375 million aid package, which apparently caused some bewilderment of the US Treasury Department.

Thus, on May 22, Treasury Secretary Janet Yellen reminded Congress that a default on June 1 is still possible if the necessary measures are not taken. Here we just recall that the US national debt in January reached the ceiling and amounted to 31.4 trillion dollars.

If no action is taken (and the talks on Monday showed that the unity of Republicans and Democrats is still very far away), then the money in the US budget may soon dry up. Janet Yellen has repeatedly warned that this will lead to the inability to accrue social benefits, fund health insurance programs, and so on. Globally, the Treasury will not be able to service the US public debt, and therefore the probability of the first default in the history of the country is so high.

According to Bloomberg Economics, the current standoff over the debt ceiling could put additional pressure on the US economy, which is already vulnerable to recession after a series of interest rate hikes by the Federal Reserve System (Fed).

Rohit Kumar, chief negotiator for the 2011 debt crisis and now director of PwC’s Washington office, expressed a more peaceful thought, assuring that the signals coming from the meeting at the White House are “a good sign for a deal.” He sees the likelihood of reaching a consensus in the next couple of days. Even if it takes a little longer, he said, a default after reaching an agreement is unlikely.

This is just an opinion. Much more important are the statements of the already mentioned Janet Yellen, who on Monday assessed the default in the style of “highly likely” (that is, “very likely”). Economists at Goldman Sachs Group Inc. last week it was estimated that the Treasury would reach a key threshold by June 8 or 9, when cash levels fall below the $30 billion low the ministry is thought to have. According to the authors, default can occur after that at any time.

Read also: Named default scenarios in the US