Concept of American financial crisis

Dire warning: US will default on debts by summer

America hit its debt limit on January 18, 2023, and the inability of the government to cover its financial obligations could be reached by summer if Congress doesn’t address the debt ceiling. What happens if the US defaults?

US projected to default on its debts by summer

The United States government could default on the national debt as soon as June if a deal is not struck between congressional lawmakers and the White House to raise the federal borrowing limit, according to projections by the nonpartisan think tank Bipartisan Policy Center (BPC).

The report identified the “X-Date,” as the date at which the Treasury Department will exhaust all extraordinary measures to avert a federal default, The Hill reported.

The think tank also warned that extensions by the White House to the repayment pause on federal student loans and the roughly $1.7 trillion government funding omnibus passed by Congress late last year could shorten the timeline.

Also working against the government is the fact that interest rates have risen faster than had been anticipated, which means the government is paying more to service its debt, which is also shortening the timeline toward “X-Date.”

The major concern is if tax revenues fall short and fail to meet expectations.

Estimates in federal spending project the amount to surpass $3 trillion, while the government will only “take in approximately $2.5 trillion between February and June 2023.”

Last month, the US Treasury Department began implementing “extraordinary measures” to prevent the government from defaulting on its debt after surpassing the $31.4 trillion debt ceiling.

What is the US debt limit, and what happens if America defaults?

The US debt ceiling, or debt limit, was officially reached on January 18, 2023. U.S. Treasury Secretary Janet Yellen announced that her department was taking “extraordinary measures” to prevent America from defaulting on the national debt.

Yellen was optimistic, saying it was unlikely the government’s cash and extraordinary measures would be exhausted before early June, although admitting there was “considerable uncertainty” around that forecast. Even if the government doesn’t default by June, some analysts say it could still occur by early fall, CNN reported.

The national debt limit is not necessarily a fixed ceiling but rather a cap that is agreed upon by lawmakers as to how much debt the US government can have. On January 18, the US reached its current limit of $31.4 trillion, NBC Washington reported.

If the US defaults…

If the American government defaults on the national debt through an inability to pay its bills that have already accumulated, a lot of very bad things will happen.

According to a warning letter sent by Treasury Secretary Janet Yellen to Congress last week, if the US defaults, the government will not be able to pay things such as Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.

Not only that, the U.S. Treasury would be unable to repay money and interest to bondholders, and the credit rating of America would be downgraded. The risk on what is now considered extremely safe US treasuries would be higher, which means the government would have to pay higher interest rates to induce people to purchase them due to the increased risk.