US debt ceiling talks continue amid risk of global financial chaos

U.S. President Joe Biden hosts debt limit talks with House Speaker Kevin McCarthy (R-CA) in the Oval Office at the White House in Washington, U.S., May 9, 2023. REUTERS/Kevin Lamarque

US President Joe Biden and Republican leaders have expressed cautious optimism that a deal to raise the US debt ceiling is within reach, following emergency talks at the White House. However, House of Representatives Speaker Kevin McCarthy told reporters the two sides are still far apart. The standoff has forced Mr Biden to cut short a foreign trip. Without a deal, the US could enter a calamitous default on its $31.4tr (£25tr) debt as soon as 1 June. A failure by the US government to meet its debt obligations could trigger global financial chaos.

The Democrats at the talks, including Vice-President Kamala Harris, Senate Majority Leader Chuck Schumer and House Minority Leader Hakeem Jeffries, rejected Republican demands for budget cuts and tougher work requirements on government aid recipients in exchange for support for raising the debt ceiling. Mr Biden has repeatedly said that a potential debt default and budgetary issues should be separate.

A default would mean the US government is unable to borrow any more money. This means the government would no longer be able to pay the salaries of federal and military employees. Social Security cheques, payments that millions of pensioners in the US rely on, would stop. Experts have warned it could see the US spiral into recession and trigger a rise in unemployment. Treasury Secretary Janet Yellen said at an event on Tuesday that “a US default would generate an economic and financial catastrophe”.

White House National Security Council spokesman John Kirby said: “There’s countries like Russia and China that would love nothing more than for us to default.” The last time the US was approaching a default, back in 2011, lawmakers struck a deal hours before the deadline. That standoff led to a downgrade in the US credit rating, sent the stock market plummeting and increased the government’s borrowing costs.

The US debt ceiling has been raised, extended or revised 78 times since 1960. A deal to avoid this scenario has so far proven elusive. In April, Republicans proposed an agreement that would suspend the debt limit by $1.5tn or until 31 March, whichever comes first. In exchange, they would maintain spending at key government agencies at 2022 levels for the next financial year and limit spending growth to 1% annually over the next 10 years. They argued this would lead to $4.8tn in savings. However, the proposal would scupper several of Mr Biden’s legislative priorities, including student loan forgiveness.

The US debt ceiling talks remain a major concern for the global financial markets. Investors fear a potential default could trigger a worldwide economic recession. As the talks continue, there is growing hope that a deal will be reached before the deadline. However, the negotiations are complex, and there are still significant differences between the Democrats and Republicans. The world is watching and waiting for a resolution to what is a critical issue for the US economy and global financial stability.