London Daily

Focus on the big picture.
Friday, Aug 22, 2025

How US Debt Default Would Affect Global Economy, Financial Markets

How US Debt Default Would Affect Global Economy, Financial Markets

Biden has maintained that default would have "catastrophic" consequences, and is urging Republicans to agree to a "clean" increase to US borrowing limits -- known as the debt ceiling -- before the deadline is reached.
President Joe Biden and Republicans in Congress have resumed crunch talks aimed at averting a damaging US debt default, which Treasury officials recently warned could come as early as June 1.

Biden has maintained that default would have "catastrophic" consequences, and is urging Republicans to agree to a "clean" increase to US borrowing limits -- known as the debt ceiling -- before the deadline is reached.

Republicans have pushed back, insisting they want an agreement from Democrats to commit to less spending in future in order for their support to extend the nation's borrowing authority.

Here is what could happen in the United States, and around the world, if the US fails to raise the debt ceiling:

What would it mean for financial markets?

If the Treasury is unable to meet all of its financial obligations, analysts forecast that US stock markets would likely suffer a sharp, temporary shock.

Along with a decline in US stocks, interest rates would spike, especially Treasury yields and mortgage rates, Moody's Analytics economist Bernard Yaros told AFP.

"That would lead to higher borrowing costs for consumers, for corporations," he said.

Households or businesses who fail to receive federal payments owed would likely pull back on near-term spending due to their loss of income, while consumer confidence may worsen, hurting the economy, Yaros said.

But any shocks are expected to be short-lived, with politicians likely to respond forcefully to any meaningful market reaction.

"I also would expect that once the deal's done the markets bounce back," Citigroup Global Chief Economist Nathan Sheets told AFP.

"I don't think that this episode is likely to be sufficiently long-lived that we should be calculating lower GDP forecasts," he said.

What would it mean for government?

Even if the United States misses the so-called X-date -- when the government runs out of money to meet all its financial obligations -- it will still have options.

It could, for instance, choose to prioritize debt repayment and delay other payments -- such as to federal agencies, Social Security beneficiaries, or Medicare providers.

This is the most likely scenario, according to Wendy Edelberg, senior fellow in economic studies at the Brookings Institution.

During a similar debt ceiling stand-off in 2011, Treasury officials drew up contingency plans to prevent a default on Treasury securities, and to ensure the Treasury would continue to pay interest on those securities as they come due.

A government shutdown would be unlikely, although federal workers' paychecks could be delayed, Edelberg said.

What would it mean for global economy?

Even if the US misses the X-date but continues repaying investors, the consequences of the political failure to reach agreement would likely ripple through global markets.

The government's inability to pay all its bills "would raise serious doubts about the nation's creditworthiness, sap the confidence of lenders, call into question the dollar's place as a reserve currency, and increase federal borrowing costs," Paul Van de Water from the nonpartisan Center on Budget and Policy Priorities wrote in a recent blog post.

"Under the present circumstances, even the serious threat of a US default could be enough to roil markets and further damage the global economy," he said.

In the unlikely event of a default, the consequences would be substantial, according to Eric Dor, director of economic studies at IESEG business school in France.

"The interest rates charged by investors on bonds issued by the United States would rise sharply," as would private debt, which uses US government debt as a benchmark, he said.

"This increase in the cost of credit would cause a drop in business and household investment, as well as in consumption, and thus a sharp recession in the United States," Dor continued, adding it could also cause a recession in Europe and elsewhere.

"A default would destabilize the global financial system, which depends on the stability of the dollar as the world's safe asset and primary reserve currency," Jean Ross from the nonpartisan Center for American Progress wrote in a recent article.

"A loss of confidence in the dollar could have far reaching economic and foreign policy ramifications, as other countries, particularly China, would use default to push for their currency to serve as the foundation of global trade," she said.

Could US debt be downgraded?

As the X-date draws closer, investors are nervously watching the ratings agencies for signs of a possible downgrade to US debt.

This last happened back in 2011, when a similar debt ceiling stand-off led ratings agency S&P to lower its US credit rating from AAA to AA+, drawing bipartisan outrage.

Even if the United States hits the debt ceiling but continues paying its bills, the ratings agencies will likely take note, according to Nathan Sheets from Citi, underscoring the need for a negotiated agreement ahead of time.

"Debates about whether or not you pay occurring periodically is typically not a feature that you would associate with a top credit" rating, he said.
Newsletter

Related Articles

0:00
0:00
Close
After 200,000 Orders in 2 Minutes: Xiaomi Accelerates Marketing in Europe
Ukraine Declares De Facto War on Hungary and Slovakia with Terror Drone Strikes on Their Gas Lifeline
Animated K-pop Musical ‘KPop Demon Hunters’ Becomes Netflix’s Most-Watched Original Animated Film
New York Appeals Court Voids Nearly $500 Million Civil Fraud Penalty Against Trump While Upholding Fraud Liability
Elon Musk tweeted, “Europe is dying”
Far-Right Activist Convicted of Incitement Changes Gender and Demands: "Send Me to a Women’s Prison" | The Storm in Germany
Hungary Criticizes Ukraine: "Violating Our Sovereignty"
Will this be the first country to return to negative interest rates?
Child-free hotels spark controversy
North Korea is where this 95-year-old wants to die. South Korea won’t let him go. Is this our ally or a human rights enemy?
Hong Kong Launches Regulatory Regime and Trials for HKD-Backed Stablecoins
China rehearses September 3 Victory Day parade as imagery points to ‘loyal wingman’ FH-97 family presence
Trump Called Viktor Orbán: "Why Are You Using the Veto"
Horror in the Skies: Plane Engine Exploded, Passengers Sent Farewell Messages
MSNBC Rebrands as MS NOW Amid Comcast’s Cable Spin-Off
AI in Policing: Draft One Helps Speed Up Reports but Raises Legal and Ethical Concerns
Shame in Norway: Crown Princess’s Son Accused of Four Rapes
Apple Begins Simultaneous iPhone 17 Production in India and China
A Robot to Give Birth: The Chinese Announcement That Shakes the World
Finnish MP Dies by Suicide in Parliament Building
Outrage in the Tennis World After Jannik Sinner’s Withdrawal Storm
William and Kate Are Moving House – and the New Neighbors Were Evicted
Class Action Lawsuit Against Volkswagen: Steering Wheel Switches Cause Accidents
Taylor Swift on the Way to the Super Bowl? All the Clues Stirring Up Fans
Dogfights in the Skies: Airbus on Track to Overtake Boeing and Claim Aviation Supremacy
Tim Cook Promises an AI Revolution at Apple: "One of the Most Significant Technologies of Our Generation"
Apple Expands Social Media Presence in China With RedNote Account Ahead of iPhone 17 Launch
Are AI Data Centres the Infrastructure of the Future or the Next Crisis?
Cambridge Dictionary Adds 'Skibidi,' 'Delulu,' and 'Tradwife' Amid Surge of Online Slang
Bill Barr Testifies No Evidence Implicated Trump in Epstein Case; DOJ Set to Release Records
Zelenskyy Returns to White House Flanked by European Allies as Trump Pressures Land-Swap Deal with Putin
The CEO Who Replaced 80% of Employees for the AI Revolution: "I Would Do It Again"
Emails Worth Billions: How Airlines Generate Huge Profits
Character.ai Bets on Future of AI Companionship
China Ramps Up Tax Crackdown on Overseas Investments
Japanese Office Furniture Maker Expands into Bomb Shelter Market
Intel Shares Surge on Possible U.S. Government Investment
Hurricane Erin Threatens U.S. East Coast with Dangerous Surf
EU Blocks Trade Statement Over Digital Rule Dispute
EU Sends Record Aid as Spain Battles Wildfires
JPMorgan Plans New Canary Wharf Tower
Zelenskyy and his allies say they will press Trump on security guarantees
Beijing is moving into gold and other assets, diversifying away from the dollar
Escalating Clashes in Serbia as Anti-Government Protests Spread Nationwide
The Drought in Britain and the Strange Request from the Government to Delete Old Emails
Category 5 Hurricane in the Caribbean: 'Catastrophic Storm' with Winds of 255 km/h
"No, Thanks": The Mathematical Genius Who Turned Down 1.5 Billion Dollars from Zuckerberg
The surprising hero, the ugly incident, and the criticism despite victory: "Liverpool’s defense exposed in full"
Digital Humans Move Beyond Sci-Fi: From Virtual DJs to AI Customer Agents
YouTube will start using AI to guess your age. If it’s wrong, you’ll have to prove it
×