The US threatened to default on June 1: how it happened and what to expect

Formally, this story (more precisely, the next page of the endless legislative and financial saga) began on January 19 of this year, when the US national debt exceeded the legal ceiling of $31.4 trillion, or about 13% of annual GDP. And then the American Treasury began to apply special accounting measures to stay within this astronomical amount.

In April, the Republicans put forward their bill, which provides for an increase in the debt limit by $1.5 trillion, and at the same time – a reduction in government spending by $4.5 trillion, as well as limiting their growth to no more than 1% per year. The document passed the House of Representatives (controlled by the Republican opposition), but did not receive approval from the Democrats in the Senate. Those demand to raise the ceiling without any conditions.

Their debts are heavy

However, let’s not abuse the terrible term “default”. Most politicians and economists agree that America will avoid it because the ceiling will eventually be raised. The question is when? The last time the bar was moved to a new height in 2021, and then the situation was resolved by a simple vote on the relevant bill, since the majority in the House of Representatives and the Senate was for the Democrats. Today, the alignment of political forces is completely different.

Recall that the US national debt is the debt of the federal government of the country to its creditors. Expenses of the treasury, traditionally exceeding revenues, are covered by the Ministry of Finance through loans, issuing special treasury papers – treasures. They are bought by American and foreign investors, receive a stable income from them, in fact, lending their money to the US economy. The national debt began to increase sharply in 2020 due to the high spending of the authorities to combat the consequences of the covid pandemic. From January to December, it added almost $4.5 trillion, although before it grew by no more than 1.5 trillion a year. Against this backdrop, the budget deficit more than tripled to $3.1 trillion. However, since then the state has managed to level the situation and achieve a surplus.

In 2017, when the United States entered World War I, Congress set a borrowing ceiling for the first time, a limit on the issuance of war bonds. Since 1960 alone, it has risen 78 times.

In 2011, it was possible to agree on this (and avoid a technical default) only three days before the onset of the “deadline”. Doubts about the creditworthiness of the world’s largest economy then led the S&P rating agency to downgrade the US credit rating by one notch for the only time in history – from the highest AAA to AA+, and the broad market S&P 500 index fell 17% in two weeks. The compromise was eventually reached after President Barack Obama’s administration agreed to cut defense and other spending. World stock markets then thoroughly shook, their main indices collapsed noticeably. Falling in price (up to 10%) on the London Stock Exchange and the securities of the largest Russian companies by market capitalization. However, since then a lot of water has flowed under the bridge, and today’s Russia – fortunately or unfortunately – can no longer be considered an integral part of the global economy and financial system.

Two worlds – two defaults

In its recent history, America has never experienced a classic default associated with an objective inability to pay its debts (like Russia in 1998). This happened only in 1790, 1861, 1933, and in 1979 there was a technical (situational) default due to a temporary lack of money in the accounts of the US Treasury. Investors see this as delinquency, not bankruptcy, and react in a stereotyped way: they move away from long bonds and other risky assets to safer ones (short bonds, cash and gold).

Paradoxically, the dollar remains the strongest defensive instrument in the face of a US technical default. Its index (DXY) and the US dollar were showing growth at the peak of the 2011 panic, while other assets were depreciating.

For the ruble, the bond with the dollar is usually realized through fluctuations in oil prices, but today it is divorced from exchange rate formation: due to sanctions, the ruble is more affected by the volume and geography of supplies than the price of a barrel of Brent. As a result, the impact of the US default, whether technical or actual, may turn out to be absolutely neutral for our country.

“The probability of an American default is negligible,” says financial analyst Sergei Drozdov. – All the current fuss around the national debt limit is nothing more than the subject of the eternal ritual bargaining between Democrats and Republicans. And, although both parties are trying to extract maximum preferences for themselves, they clearly do not intend to act to the detriment of their country. With a very high degree of probability, the ceiling will be agreed upon, and if not, the States, in the worst case, face a shutdown: the government will partially stop working, and employees will be sent on forced leave.

This is far from the situation of 1998 in Russia, when the state treasury was empty, and there was nothing to pay creditors with. Another thing is that the delay increases the atmosphere of nervousness in the debt and financial markets – both in the US itself and in the world.

Russia, due to the sanctions war with the West, cut off from the global financial system, has nothing to fear. And even if the dollar begins to lose ground against other currencies, this is unlikely to have any effect on the ruble exchange rate, which is being formed today under the influence of very peculiar, purely internal factors.

As Drozdov recalls, last year’s events became a striking example: while the dollar showed growth, against the background of the Fed’s rate hike, the ruble strengthened. And its exchange rate dynamics was influenced by completely different circumstances, such as geopolitics and investors’ fears about the imposition of sanctions by the West against the National Clearing Center (NCC). So direct parallels are inappropriate in this case.

Crazy step

“The farce unfolding before our eyes with an increase in the US government debt limit does not deserve serious attention,” says Vladislav Inozemtsev, director of the Center for Post-Industrial Society Studies. – It could be a good chance for speculative play on the stock exchanges, but it would be naive to believe that the Americans can orchestrate a default on treasury bills (treasury bonds), which the government never announced. The problem itself seems to me “sucked from the finger.” The United States today is the only country in the world that has such a hard limit. In addition to it, only Denmark has a law that sets the ceiling of the public debt in absolute terms, but its current limit is much higher than the actual values.

Let’s say, if we take the European Union, during the transition to the euro, it set the criteria for membership in the eurozone to keep the member countries’ budget deficit within 3%, and public debt – 60% of GDP. This norm has been violated by individual EU countries for more than two hundred times, and the ratio of public debt to GDP for the euro area is now about 90% (20 out of 27 EU countries are outside the criterion). No one makes a tragedy out of this, notes Inozemtsev. And in Russia, where public debt is very low, the limit itself also exists, and is indicated in each federal budget – but it is revised, if necessary, just as naturally as other budget parameters.

“In America, this tool was not supposed to limit the federal authorities, but, on the contrary, give them more freedom, because before its introduction (at the beginning of the 20th century), the Treasury had to coordinate with Congress every bond issue,” explains Inozemtsev. – However, in the last 50 years, the ceiling has become a problem created from scratch. At the same time, its parameters are not of decisive importance for the United States, since since the end of the 2000s, the most important (and since 2020 – almost the only) buyer of new issues of treasury bills has been the Federal Reserve System.

And the Fed always gives money to the government without increasing dependence on the outside world, and also returns to the budget in the subsequent tax period most of the interest paid by the Treasury on these bonds.

Against this background, the announcement of a default would look like madness: this step would collapse the quotes of all American obligations – not only government, but also corporate ones, would undermine the Fed’s ability to regulate economic activity by changing the base rate, and would cause a series of bank collapses. And most importantly, there is no benefit from it, which is well known to representatives of both parties.

Therefore, there is no doubt that the parties will agree and the debt ceiling will be raised once again (although it would be much more correct to cancel it long ago, as Australia did in 2013).

The only question is whether it will be possible to meet the deadline until June 1, or the auction will drag on for another month or two. According to the Congressional Budget Office, the government still has the ability to avoid stopping debt payments until the end of August by using reserves and temporarily cutting funding on a number of unprotected items. In a word, sums up Inozemtsev, sooner or later the Americans will solve their “paper” problems, which the Russians should not bother with at all.

Risks of fiscal chaos

“The current story with the debt ceiling is typical for the United States, there is nothing extraordinary in it,” says Nikita Maslennikov, a leading expert at the Center for Political Technologies. – The approaching start of the presidential race gives it an increased emotional and speculative coloring.

Almost every head of the White House faced the need to solve this problem: for example, Clinton and Obama had two episodes each. And it happened that the Ministry of Finance did not finance the government for up to a month. But the result has always been the same – Democrats and Republicans found a compromise. Now they will find it too – for example, by increasing the ceiling by $1.5 trillion (in exchange for cutting government spending). Moreover, a certain safety cushion has been created: over the seven months of the fiscal year, the US budget surplus grew 2.6 times year-on-year, amounting to $176 billion in April. This will allow it to last at least until the end of June.”

So far, international rating agencies are not prone to panic. Although they admit that if the resolution of the issue drags on for another week, this may lead to “outbursts of volatility” in the stock markets. Plus, an additional burden will fall on the dollar, but whether it weakens as a result or not is a big question.

As for the potential impact on the Russian markets and the ruble, Maslennikov sees it as indirect (through the dynamics of the dollar) and extremely insignificant. In the opinion of the interlocutor of MK, experts in the United States themselves are mainly showing an alarmist mood today. For example, economists at the Brookings Institution are sure that dubious maneuvers with the national debt ceiling lead to fiscal chaos.

Under the blow were the main items of government spending of the country: health insurance (25%), pensions and benefits (20% each), defense (13%) and interest payments on public debt (8%). And the White House Council of Economic Advisers warns that if the US fails to pay its obligations long enough, GDP will fall by 6.1% and unemployment will rise by 5%. As a result, the economy will be hit harder than during the last financial crises of 2008 and 2020.

Meanwhile, the US public debt is the main reserve asset in the world: almost 60% of savings is kept in dollars (20% – in euros, 5% in yen and pounds, 3% in yuan). The global financial system is based on the axiom that Washington will never default on its dollar obligations, as long as it prints as much as it needs. US government bonds are considered benchmarks in terms of risk. So a default, despite the improbability of such a scenario, will have not only purely economic, but also psychological consequences.