Even with a Dramatic US Debt Ceiling Deal... "Comprehensive Impact on Economy, Finance, and Security"

"Dramatic Agreement Achieved, but US Dominance Inevitably Weakens"

As negotiations over the U.S. federal government's debt ceiling are expected to conclude around next week, an analysis suggests that even if a dramatic last-minute deal is reached, the costs the U.S. will have to bear in financial, economic, and security aspects will be significant.

Bloomberg reported on the 18th (local time) that even if the U.S. narrowly avoids a default crisis at the last moment, its reputation as a "nation that faithfully honors its debt" will suffer a severe blow, with effects lasting for months or even years. Investors are already no longer viewing U.S. Treasury securities as "risk-free assets," leading to increased borrowing costs for the U.S.

In recent U.S. Treasury auctions, the yield on 1-month Treasury bills maturing in the first week of next month surged to 5.84%, marking the highest level in 13 years. The sharp rise in yields on ultra-short-term Treasuries maturing around the negotiation deadline is becoming evident. Bloomberg assessed that "the dominance of the U.S. and the global economy, which was able to raise funds at lower costs than other countries by issuing $24 trillion (approximately 32,100 trillion KRW) in Treasury securities even during the Ukraine war and the COVID-19 pandemic, is being eroded by the debt ceiling standoff."

There are also concerns that the debt ceiling crisis is shaking the dollar's status as the world's reserve currency. According to the U.S. Congressional Budget Office (CBO), the dollar's share of reserves held by central banks worldwide has fallen below 60%, the lowest level since 1990 (50.6%), just before the end of the Cold War. Eswar Prasad, author of "The Future of Money" and professor of economics at Cornell University, stated, "It is becoming increasingly difficult to see the U.S. as a country with a sound financial system supported by a strong policymaking process characterized by checks and balances." Bloomberg Economics, an economic research institute under Bloomberg, previously analyzed that prolonged deadlock in debt negotiations could lead to an 8% year-over-year decline in U.S. GDP in the second half of the year.

[Image source=Reuters Yonhap News]

The debt ceiling standoff is also impacting U.S. national security. Avril Haines, Director of National Intelligence (DNI), warned on the 4th that the possibility of default could combine with geopolitical crises. Speaking before the Senate Intelligence Committee, she said, "Russia and China are likely to exploit the possibility of a U.S. default to conduct information operations aimed at spreading default-related confusion within the U.S.," adding, "Moreover, if a default materializes, they will attempt to undermine the stature of U.S. leadership and institutions on the world stage."

President Joe Biden has shortened his planned Asia trip due to the debt negotiations, dealing a significant diplomatic blow. Biden will attend only the Group of Seven (G7) summit from the 19th to 21st (local time) and return early. His visits to Papua New Guinea on the 22nd and to Australia on the 24th for the Quad (the U.S., Japan, Australia, and India alliance) summit were canceled at the last minute. Bloomberg pointed out that the Papua New Guinea visit and Quad summit had long been prepared to counter China's rise in the Indo-Pacific region, and this change could lead to a loss of trust among allies who must confront China's assertiveness, potentially worsening relations.

Although the first and second rounds of debt ceiling negotiations held on the 9th and 17th ended without results, both the White House and Republicans expressed optimism about the outcome. President Biden expressed confidence that an agreement would be reached, and House Speaker Kevin McCarthy of the Republican Party asserted that a default would not occur. McCarthy also indicated that a vote on the agreement could take place as early as next week, but due to the complex legislative process, there are forecasts that the Treasury's cash reserves will be exhausted, passing the so-called "X-Day."

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