The Tribune

By CHRIS ILLING

CCO @ ActivTrades Corp

The US federal government's debt ceiling has been reached and the clock is once again ticking. A default is imminent. International Monetary Fund (IMF) spokeswoman, Julie Kozack, fears "very serious" consequences for the global economy. The stock market is already getting nervous. The markets were down for the last two trading days of the week.

Ms Kozack, speaking on Thursday last week in Washington D.C., said: "For this reason, we urge the parties concerned to urgently find a consensus to resolve this matter as soon as possible." The US had already reached the debt limit of just under $31.4trn in January. Since then, the US government has been using “extraordinary measures” to prevent insolvency. However, the possibilities for this will soon be exhausted.

In the US, Congress sets a debt ceiling and determines how much money the state can borrow. The debt ceiling has now been reached, and the US Treasury must tap into its capital reserves since the US is now no longer allowed to take on new debt to pay its bills. US president, Joe Biden, needs the Republicans in order to raise this limit. However, they are opposed to an increase without significant savings in certain government spending.

The Republicans, who hold a majority in the House of Representatives, the lower Chamber of Congress, will only approve an increase in the debt ceiling in return for federal spending cuts worth billions of dollars. They want to turn back key elements of Biden's reform policies.

The US government debt is intertwined with the entire financial system, making it truly impossible to know what will happen in the event of a default. The stock market is often seen as a barometer of the overall health of the economy, and a debt default could create significant uncertainty and undermine investor confidence.

It is quite certain that such a default would likely result in a sharp decline in stock prices. Investors would be concerned about the stability of the overall financial system and the potential for a broader economic downturn. This could trigger a sell-off in the stock market as investors look to exit their positions and minimise their losses.

In addition to the short-term consequences, the long-term effect would be a downgrade in the country’s debt rating, which would make it more expensive for the US government to borrow money in the future. This would then lead to even higher interest rates and slower economic growth. Another long-term effect would be reduced consumer spending and a halt to new investments.

But the exact extent of the damage would depend on the severity and duration of the default, as well as the US government’s response. Yet markets would decline, and we would see a period of high volatility. This will also create opportunities for the savvy investor.