"More Serious Than 2011" US Default Concerns...Will a Breakthrough Be Found This Week?

As early as June 1, concerns are growing that the U.S. federal government may face an unprecedented debt default, while officials from the Joe Biden administration continue discussions with Congress to prevent the worst-case scenario. Earlier this week, a second round of negotiations between President Biden and congressional leaders, which had been postponed, is also scheduled to take place. However, with a tense standoff between the White House and Republicans over raising the debt ceiling, significant obstacles are expected before a final agreement can be reached. Analysts are pouring out opinions that the situation is more severe than in 2011, when the financial market was thrown into chaos due to a sharp stock market plunge and credit rating downgrade.

[Image source=AP Yonhap News]

Lael Brainard, Chair of the National Economic Council (NEC), said in an interview with CBS on the 14th (local time) that when asked how close the negotiations on raising the debt ceiling were to being finalized, "We are having serious and constructive conversations." He emphasized that the responsibility for raising the debt ceiling lies with Congress but added, "The administration will also do what is necessary."

The U.S. exhausted its $31.4 trillion debt ceiling in January and has been relying on special measures since then. If Congress does not raise the debt ceiling, an unprecedented default could trigger job losses and financial market turmoil. The Wall Street Journal (WSJ) reported, "Both Wall Street and political circles were shocked by the government's warning of a possible default on June 1. The bill has come due sooner than expected," adding, "This is accelerating urgent discussions between the Biden administration and congressional Republicans."

However, negotiations have not been smooth so far. Last week, a meeting between President Biden and House Speaker Kevin McCarthy, along with other congressional leaders, took place but only confirmed differences in positions. The second meeting, scheduled for the 12th, was postponed, indicating little progress in working-level discussions. The Republican Party, which holds the majority in the House, opposes raising the debt ceiling unless there are significant government spending cuts. Meanwhile, the White House and Democrats insist that the debt ceiling is not negotiable and demand an unconditional increase.

President Biden and congressional leaders are set to hold a second meeting early this week. Considering that President Biden will embark on a three-country tour starting on the 17th, including attending the G7 summit in Japan, attention is focused on whether progress can be made during the second meeting on the 15th or 16th. Biden told reporters the day before, "There are substantive discussions about some changes," and added, "We will know more in the coming days." After the first meeting, he even mentioned the possibility of not attending the G7 summit, expressing his determination to resolve the debt ceiling issue.

Concerns are already mounting in the market. There is growing apprehension that a congressional deadlock over raising the debt ceiling could escalate, leading to a repeat of the August 2011 situation, which saw a sharp stock market plunge and a downgrade of the national credit rating. At that time, S&P Global downgraded the U.S. credit rating from AAA to AA+, followed by Black Monday. The political news outlet The Hill reported, "It reminds us of 2011," adding, "The U.S. is more polarized now, and both sides are more resolute. Within the Republican Party, there is even a mood willing to risk default."

If no breakthrough is found in the early-week meeting, market caution will inevitably intensify. Moreover, with the Senate scheduled to recess for Memorial Day from the 22nd to the 29th, the deadline is even tighter. The Congressional Budget Office (CBO) reiterated in an updated report on the 12th that if the debt ceiling is not raised, there is a risk of default in the first or second week of June.

On the morning of the same day, House Foreign Affairs Committee Chairman Michael McCaul criticized Congress for "playing a dangerous game." Democratic Representative Emanuel Cleaver, who has served in Congress for over 19 years, expressed concern, saying, "This is the first time I feel that the debt ceiling will not be adjusted in time to prevent a national crisis," adding, "I have never seen such a situation. It could be one of the greatest political mistakes in history."

Thomas Kane, who served as a Democratic advisor to the House Budget Committee for decades, including during 2011, also warned that the situation is more serious than in 2011, citing that the spending cuts currently demanded by Republicans are deeper than in 2011, some conservative Republicans are prepared to risk default to achieve their goals, and House Speaker McCarthy's weak position within the Republican Party. Now affiliated with a university, he added, "I pray it does not happen, but I would not rule out the possibility of a default lasting a few days."

Some analysts suggest that the Biden administration may ultimately take emergency measures to raise the debt ceiling without congressional approval, based on the 14th Amendment. Democratic Representative John Larson said, "If necessary, we should use the 14th Amendment." However, Treasury Deputy Secretary Wally Adeyemo told CNN in an interview that "the president does not believe the 14th Amendment will solve the problem," emphasizing, "The only way to solve this is for Congress to raise the debt ceiling." He reiterated that the current situation is negatively affecting not only financial markets but also consumer sentiment, and that the debt ceiling must be raised as soon as possible.

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