Alarming US Debt Ceiling Impasse

The United States encountered a potential debt default by the beginning of June this year due to the country's debt ceiling reaching its maximum limit, as said by Treasury Secretary Janet L. Yellen on Monday (5/1). The recent development has stirred up concern among investors, resulting in a decrease in the valuation of the U.S. dollar. This has subsequently prompted apprehensions regarding inflationary pressures and the potential for economic instability. The debt limit is the U.S. government's maximum limit of funds that can be borrowed to pay its bills, which includes debt interest payments. Correspondingly, congressional approval to increase the debt ceiling is needed to prevent a government shutdown, a drop in the U.S. credit score, higher borrowing costs, a global financial crisis, and further economic downturns. The U.S. debt has been growing consistently, and the pandemic has also aggravated the situation by driving up spending on relief programs. Additionally, the Congressional Budget Office collected lower tax receipts than the amount anticipated from income tax payments in April. Future tax payments are also forecasted to have a negligible impact. The Federal Reserve and Treasury Department of the U.S. have taken some actions to suppress debt defaults. One is to halt the issuance of state and Local Government Series Treasury securities to control the debt limit risks. Despite efforts to tackle the issue, those initiatives are temporary and not considered a long-term strategy to address the U.S. debt and deficit matters.

The U.S. central bank decided to increase the benchmark overnight interest rate by a quarter point, resulting in a 5% - 5.25% range. The Fed signaled that the recent rise on Wednesday (5/3) could be its last. Jerome Powell, the Chair of the Federal Reserve, announced that the institution is no longer anticipating any additional interest rate hikes, which was then referred to as a significant shift. However, the change does not prevent the central bank’s policy-setting committee from hiking rates again when it meets in June. The Spokesman said it was now an open question whether further increases would be justified in an economy facing high inflation but also on the brink of a significant debt crackdown. Subsequently, lawmakers must undertake extraordinary measures so that the debt limit does not bind. Not meeting the expected standard would quickly pose negative economic effects and risk triggering a deep recession. Such an event would surely be adverse, albeit there is uncertainty regarding the cost the U.S. economy would incur if a credit default occurred. One of the expenses incurred by the U.S. government relates to the interest paid on Treasuries. The U.S. government pays a lower interest rate on Treasury securities due to the unparalleled safety and liquidity of the Treasury market. This advantage lowers the amount of interest expense incurred by the government. If the debt limit binds, then a portion of this advantage would cease, and taxpayers would have to fill in the increased expense.

Downturns in the U.S. and European markets sparked a further decline in The Composite Stock Price Index (IHSG), reaching an amount of 6,862.05 on Wednesday (5/3). This current economic condition that the Indonesian Stock Exchange is facing is the impact of Wall Street and other foreign markets around the globe, where a tight correlation between Indonesian and foreign stock exchange markets is very much present. Therefore, creating a domino effect on The Composite Stock Price Index (IHSG). Valdy Kurniawan, Head of Research at Phintraco Securities, stated that the index on Wall Street experienced a decrease of over 1% on Tuesday (5/2) due to the continuing downward trend of bank stock prices. Issues regarding U.S. government spending, which surpassed their tax income, led them into a deficit of approximately US$400 billion to US$3 trillion annually. The U.S. Treasury is now ensuring its financing strategy in issuing securities, such as U.S. government bonds, which are eventually repaid with interest. Once the U.S. government reaches its debt limit, the Treasury is unable to make withdrawals, which stops the flow of funds to its state budget. With a current debt limit of US$31.4 trillion, it is held responsible for withstanding and expected to recover based on its history, enlightened by the Bank of Indonesia.

Sources:

BBC

CNN

The New York Times

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