In 2011, When the US Debt Ceiling Was Not Raised... The Korean Stock Market Suffered More

First Ever US National Credit Rating Downgrade
Ripple Effects Spread to Global Stock Markets
KOSPI Plummets 17% Over One Week

As the standoff between the executive branch and the Republican Party continues over the U.S. federal government debt ceiling, concerns about a default are growing. What would happen if the U.S. government actually declared a default?

During the Barack Obama administration in 2011, debt negotiations also broke down, raising fears of a default. That year, the United States, the world's top reserve currency country, lost its top national credit rating for the first time, and the shock spread across global stock markets.

Biden vs. Republicans Standoff... Approaching Default Deadline

President Joe Biden of the United States and House Speaker Kevin McCarthy
[Photo by Yonhap News]

On the 9th (local time), U.S. President Joe Biden met with congressional leaders including Republican House Speaker Kevin McCarthy to discuss raising the government debt ceiling, but reportedly failed to reach any agreement.

The current U.S. government debt ceiling is $31.4 trillion (approximately 41,652 trillion KRW). However, with the government deficit soaring recently, concerns are mounting that if the ceiling is not raised further, a default (debt non-payment) could occur within June.

The government and the ruling party want to raise the debt ceiling to avoid a default, but the Republican Party, which holds the majority in the House of Representatives, is firmly opposed. They argue that the crisis should be resolved by reducing government spending rather than increasing debt. After the meeting, Speaker McCarthy criticized, "President Biden did not present any ideas related to spending cuts."

Global Stock Market Plummeted During 2011 Default Crisis

US Treasury Building
[Image source=Yonhap News]

So, could the U.S. really reach a default situation? Since the 2008 financial crisis, U.S. government debt has rapidly expanded, and the country has faced several 'debt ceiling crises' over the past decade.

The situation most similar to the current one was the 2011 crisis. At that time, the Obama administration tried to raise the debt ceiling, but the Republican majority in the House opposed it, leading to a deadlock. The U.S. political sphere failed to reach an agreement until the negotiation deadline was nearly over, and the possibility of a default crisis began to be seriously considered.

However, the crisis erupted elsewhere rather than in a default. The three major credit rating agencies (S&P, Moody's, Fitch), viewing the U.S.'s debt management ability as severely impaired, consecutively downgraded the U.S. national credit rating.

On August 5, 2011, S&P was the first to downgrade the U.S. national credit rating from the highest AAA to AA+, marking the start of the crisis. It was a historic event where the United States, the world's strongest country holding the top reserve currency dollar, lost its top credit rating status.

The downgrade's impact quickly spread throughout global financial markets. Liquidity flowed into safe assets, and the biggest victims were stock markets worldwide, including the U.S.

South Korea's KOSPI, which comprises the top 100 domestic companies, plunged 17% over six trading days in early August, falling to 1801.35 points. This was the second-largest drop since the Lehman Brothers bankruptcy.

Ironically, U.S. Treasury yields, which are directly related to the national credit rating, actually fell. This was due to a preference for safe assets, showing that despite debt issues, investors' confidence in the U.S. Treasury, the financial arm of the world's largest economy, remained solid.

"U.S. Debt Ceiling Has Become a Bipartisan Chicken Game"

House Speaker McCarthy speaking after meeting with President Biden
[Photo by Yonhap News]

The 2011 debt crisis was ultimately resolved dramatically with the passage of the Budget Control Act (which raised the debt ceiling while establishing a bipartisan 'supercommittee' to seek deficit reduction plans, and triggered automatic federal budget cuts, known as sequestration, if the committee failed to reach an agreement).

Both domestically and internationally, the prevailing view is that the U.S. will again raise the debt ceiling through an agreement. According to the U.S. Treasury, Congress has raised the debt ceiling 78 times from 1960 to 2021, meaning it has been increased at least once every year.

However, criticism continues that the debt issue has been reduced to a 'power struggle' between the two parties in the U.S. The opposition party uses the threat of 'default' as leverage to control the budget, while the executive branch and ruling party have raised the debt ceiling without any substantial deficit reduction plan. The British broadcaster BBC described the U.S. debt ceiling as having become a "political chicken game."

Nevertheless, the burden that a default crisis would place on international financial markets and the U.S. economy is real. If a situation similar to 2011 recurs, a credit rating downgrade could happen again.

Moreover, if an actual default occurs, hundreds of thousands of public workers employed by the federal government would immediately face unpaid wages. This alone is expected to cause massive disruption to local economies.

This content was produced with the assistance of AI translation services.