Treasury Secretary Janet Yellen warned of the possibility of default again a day ahead of the renegotiation between the White House and the opposition Republican Party to raise the federal government’s debt ceiling. If the debt ceiling is not raised by June 1, the U.S. will default on its debt.
In the financial market, it is expected that the two sides will eventually reach an agreement to avoid default, but they are concerned that the longer the negotiations, the higher the volatility of the market due to a ‘brinkface confrontation’. At the G7 finance ministers’ meeting held in Japan, criticism was raised that the repeated US political risks over debt “undermine confidence in the US and the dollar.”
Secretary Yellen sent a letter to the U.S. Congress on the 15th (local time), saying, “The interest rate on government bonds maturing in early June has risen,” and announced that the Treasury Department’s borrowing costs are already increasing due to prolonged negotiations. It pointed out that in early May, the one-month US Treasury bond yield soared to 5.84% due to the increased risk of the US federal government’s default. This was the largest in history.
The market believes that if an agreement cannot be reached in the renegotiation between President Joe Biden and House Speaker Kevin McCarthy scheduled for the 16th, the global financial market, including US Treasury bonds, will be further shaken. Michael Wilson, a Morgan Stanley strategist, pointed out, “It’s a game where everyone loses just by confrontation.”
The United States, the world’s No. 1 economy, has a system that requires Congress to approve limits on federal debt. President Biden said he was “optimistic” about the negotiations following the 9th, but Chairman McCarthy raised anxiety by saying that “both sides are still far away.”
In particular, ahead of next year’s presidential election, former President Donald Trump ordered a hardline response in a CNN interview, saying, “If the Biden administration refuses to cut spending, we must go to default.” is impossible to reduce. The Wall Street Journal (WSJ) pointed out that “time is not on Washington’s side,” and that “disagreements over the scope of negotiations, tight legislative timelines, and late start of negotiations complicate the negotiations.”
The fact that the United States goes bankrupt means that trust in the ‘risk-free asset’ US Treasury bonds, which are the standard for all financial assets around the world, collapses. It is bound to lead to a serial collapse of financial assets. Concerns about this emerged at the recent G7 finance ministers’ meeting.
According to the WSJ, British Treasury Secretary Jeremy Hunt was concerned that “(US default) is a serious risk to the world economy”, and Bank of Japan Governor Kazuo Ueda of Japan, the largest creditor of the United States, said that the US government’s default would “be difficult to resolve”. It can,” he warned. German Finance Minister Christian Lindner also urged the US politicians to reach an early agreement, saying, “We are keeping an eye on the US.”
Indonesia’s finance minister, Sri Mulyani Indrawati, who is not a member of the G7 but was invited to the meeting, said that “global trust in the United States is eroding” due to repeated debt uncertainty. After all, the world is starting to ask if we should learn to disconnect and not get entangled in the US debt crisis.” Minister Yellen has also stressed several times that the US default crisis will “undermine global economic leadership.”
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Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.