London Daily

Focus on the big picture.
Friday, Dec 19, 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
US Envoy Witkoff to Convene Security Advisers from Ukraine, UK, France and Germany in Miami as Peace Efforts Intensify
UK Retailers Report Sharp Pre-Christmas Sales Decline and Weak Outlook, CBI Survey Shows
UK Government Rejects Use of Frozen Russian Assets to Fund Aid for Ukraine
UK Financial Conduct Authority Opens Formal Investigation into WH Smith After Accounting Errors
UK Issues Final Ultimatum to Roman Abramovich Over £2.5bn Chelsea Sale Funds for Ukraine
Rare Pink Fog Sweeps Across Parts of the UK as Met Office Warns of Poor Visibility
UK Police Pledge ‘More Assertive’ Enforcement to Tackle Antisemitism at Protests
UK Police Warn They Will Arrest Protesters Chanting ‘Globalise the Intifada’
Trump Files $10 Billion Defamation Lawsuit Against BBC as Broadcaster Pledges Legal Defence
UK Says U.S. Tech Deal Talks Still Active Despite Washington’s Suspension of Prosperity Pact
UK Mortgage Rules to Give Greater Flexibility to Borrowers With Irregular Incomes
UK Treasury Moves to Position Britain as Leading Global Hub for Crypto Firms
U.S. Freezes £31 Billion Tech Prosperity Deal With Britain Amid Trade Dispute
Prince Harry and Meghan’s Potential UK Return Gains New Momentum Amid Security Review and Royal Dialogue
Zelensky Opens High-Stakes Peace Talks in Berlin with Trump Envoy and European Leaders
Historical Reflections on Press Freedom Emerge Amid Debate Over Trump’s Media Policies
UK Boosts Protection for Jewish Communities After Sydney Hanukkah Attack
UK Government Declines to Comment After ICC Prosecutor Alleges Britain Threatened to Defund Court Over Israel Arrest Warrant
Apple Shutters All Retail Stores in the United Kingdom Under New National COVID-19 Lockdown
US–UK Technology Partnership Strains as Key Trade Disagreements Emerge
UK Police Confirm No Further Action Over Allegation That Andrew Asked Bodyguard to Investigate Virginia Giuffre
Giuffre Family Expresses Deep Disappointment as UK Police Decline New Inquiry Into Andrew Mountbatten-Windsor Claims
Transatlantic Trade Ambitions Hit a Snag as UK–US Deal Faces Emerging Challenges
Ex-ICC Prosecutor Alleges UK Threatened to Withdraw Funding Over Netanyahu Arrest Warrant Bid
UK Disciplinary Tribunal Clears Carter-Ruck Lawyer of Misconduct in OneCoin Case
‘Pink Ladies’ Emerge as Prominent Face of UK Anti-Immigration Protests
Nigel Farage Says Reform UK Has Become Britain’s Largest Party as Labour Membership Falls Sharply
Google DeepMind and UK Government Launch First Automated AI Lab to Accelerate Scientific Discovery
UK Economy Falters Ahead of Budget as Growth Contracts and Confidence Wanes
Australia Approves Increased Foreign Stake in Strategic Defence Shipbuilder
Former UK Prime Minister Boris Johnson proclaims, “For Ukraine, surrendering their land would be a nightmare.”
Microsoft Challenges £2.1 Billion UK Cloud Licensing Lawsuit at Competition Tribunal
Fake Doctor in Uttar Pradesh Accused of Killing Woman After Performing YouTube-Based Surgery
Hackers Are Hiding Malware in Open-Source Tools and IDE Extensions
Traveling to USA? Homeland Security moving toward requiring foreign travelers to share social media history
UK Officials Push Back at Trump Saying European Leaders ‘Talk Too Much’ About Ukraine
UK Warns of Escalating Cyber Assault Linked to Putin’s State-Backed Operations
UK Consumer Spending Falters in November as Households Hold Back Ahead of Budget
UK Orders Fresh Review of Prince Harry’s Security Status After Formal Request
U.S. Authorises Nvidia to Sell H200 AI Chips to China Under Security Controls
Trump in Direct Assault: European Leaders Are Weak, Immigration a Disaster. Russia Is Strong and Big — and Will Win
"App recommendation" or disguised advertisement? ChatGPT Premium users are furious
"The Great Filtering": Australia Blocks Hundreds of Thousands of Minors From Social Networks
Mark Zuckerberg Pulls Back From Metaverse After $70 Billion Loss as Meta Shifts Priorities to AI
Nvidia CEO Says U.S. Data-Center Builds Take Years while China ‘Builds a Hospital in a Weekend’
Indian Airports in Turmoil as IndiGo Cancels Over a Thousand Flights, Stranding Thousands
Hollywood Industry on Edge as Netflix Secures Near-$60 Bln Loan for Warner Bros Takeover
Drugs and Assassinations: The Connection Between the Italian Mafia and Football Ultras
Hollywood megadeal: Netflix acquires Warner Bros. Discovery for 83 billion dollars
The Disregard for a Europe ‘in Danger of Erasure,’ the Shift Toward Russia: Trump’s Strategic Policy Document
×