PostHeaderIcon Possible Consequences Of A US Debt Default

The US came disastrously close to a debt default if it were not for the US Congress agreeing to increase the country’s debt ceiling of $14.3 trillion. But even then, the country may not yet be out of trouble. But for the meantime, increasing the debt ceiling may have averted what could have been a very painful blow to an already struggling US economy that has not yet risen from the beating it took several years ago. The effect of a US debt default would have rippled through the financial markets all around the globe. Here are the possible scenarios in case the US would have defaulted on its debt.

US will miss payments.

If ever the US defaults on its debt, it may not be able to pay for costs incurred from government contractors or even on government assistance services. It might even missed paying on some of its government employees or slashing down on its spending. The US usually borrows around 40 percent of the money that it spends. In case of a debt default, the country may not be able to borrow any more, which might result in billions of dollars lost immediately.

US will experience a credit downgrade.

In the event that the US may enter into a debt default scenario, it may have to go through a credit downgrade. Currently, the US has that much coveted AAA credit rating, placing it in a category where their borrowings have the least possibility of not being paid. A credit downgrade may affect the country’s credibility in terms of servicing its debts. A credit downgrade may lead the US to borrow money but at a higher interest rate. This also goes for all types of credit in the US and might have dire consequences on the economy in general.

Financial markets will be seriously affected.

A US debt default will also affect stock markets not only in the country but all around the world. Just a point of comparison- the collapse of investment bank Lehman Brothers in 2008 led to the Dow Jones closing with 504 points down in a single day. A US debt default may be seen to have a bigger negative effect on markets than that. And since the US Treasury serves as a benchmark for many of the financial markets all around the world, the negative ramifications would eventually lead to a ripple effect on the global market.

Credit crisis may be eminent.

With the US debt default causing interest rates to go up, there would be less ideal credit climate that may lead to a credit crunch. Businesses may not readily by given available credit and if they do, may have to face paying higher interest rates which may slow down growth. This would eventually have a drastic effect on the US economy even as it tries to recover.

US Dollar may possibly lose its reserve currency status.

The US dollar has long been considered as the currency used mainly for doing global business. A debt default may likely lead to the US dollar losing this valuable status as it can be seen as a volatile currency, much like what a credit downgrade can do to it.


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