Will raising the debt ceiling cause a reprieve to the financial markets?

Team Veye | 28-May-2023 financial markets

Financial markets across the world heaved a sigh of relief when just days before a potential first-ever default, US President Joe Biden and Republican Kevin McCarthy announced on Saturday to raise the federal government's $31.4 trillion debt ceiling.

The threat to the economy is such that even getting close to a breach of the U.S. debt ceiling could cause significant disruptions to financial markets. And imagine what could an actual default do?

An actual breach of the U.S. debt ceiling can not only cause severe damage to the U.S. economy but also unleash global chaos. A default by the U.S. government on its obligations could set the economy into back gear, the extent of damage depending on the tenure of the breach.

Defaulting could reverse the economic gains, curbing the consumer spending that has set the economy on a growth path, denting a strong job market which has led to the creation of jobs and an unemployment rate near a 50-year low.

The Treasury had warned that the US will run out of money on 5 June without a deal, which after weeks of tough negotiations, still has to be approved by Congress.

Though raising the debt ceiling is a legal measure taking place most of the years to allow the government to keep borrowing money. A routine act by Congress earlier, the debt limit vote has come to be used as political leverage in recent times. This time around, Republicans demanded deep spending cuts mainly in social spending.

According to US media reports, the framework of the deal includes freeing up the debt ceiling for two years, meaning there will be no need for negotiations till in 2025. Enough to give a possible boost to the markets.


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