What will happen if the debt ceiling crisis is not resolved before the beginning of June?
The US government could default on its bills next month if Congress does not raise the $31.4 trillion debt ceiling, which could lead to economic disaster and market panic, according to officials at the highest levels of US and global financial institutions.
Here is a timeline of how the payments chain could collapse, based on a warning from the US Treasury Department that cash could run out by June 1.
The US Treasury’s cash funds will be emptied, leading to the debt ceiling being reached. That day’s roughly $26 billion in revenue will not be enough to cover the roughly $101 billion in spending commitments approved by Congress.
Who will be denied payments?
If the Treasury Department were to run according to plan in 2011, it would not choose which bills to pay, but rather wait until there were all the funds needed to cover the bills for the whole day. The Treasury will ignore the $47 billion payment to Medicare providers, the US public health insurance program for seniors. In addition, soldiers’ salaries will not be paid.
Wall Street investors, who hold US bonds, can still get their money for now, but there are risks. And with the deadline to repay some of the bonds, including more than $100 billion due on June 1, the Treasury will borrow enough to repay, without exceeding the debt ceiling.
And if the holders of those bonds refuse to renew them, for fear that the United States will default on its return, this may lead to America not making some payments and reaching a state of default, which is something that shakes the global financial system.
Even if Washington stays paying its debts on time, stock markets are likely to shake, which could put pressure on Republican House Speaker Kevin McCarthy and Democratic President Joe Biden to act quickly. Republicans, who control the House of Representatives, are demanding sharp spending cuts in exchange for their support for raising the debt ceiling.
And without an agreement, more checks may not be sent for the day, as retirees and the rest of the Social Security beneficiaries, who are owed $25 billion, will be ignored. Also, US states will not receive the $2 billion they owe for health support for the poor in Medicaid. At that time, money will not be paid to large sectors of the country.
Weapons manufacturers and other companies that supply equipment to the US military will not get the $2 billion they are owed.
After a week of crisis, some checks can finally be sent. The US treasury will have collected about $110 billion in taxes since it stopped being able to borrow, after reaching the debt ceiling, which is enough to cover the bills due since the beginning of the month. But more bills will pile up, and the nearly $1 billion owed to Americans waiting for their tax refunds that day will not be paid.
Education programs run by local governments will not receive $1 billion in funding. And the crisis in American hospitals will worsen with the delay in the payment of federal insurance payments.
Things will get even more complicated on June 15, when the Treasury must pay investors nearly $2 billion in interest they owe on the national debt. And in 2014, the Treasury Department confirmed, in another approach to the debt ceiling, that it would prioritize the payment of interest on the debt (bonds) over other liabilities due that day, such as military salaries.
(Reuters, The New Arab)