For now, the uncertainty is over and the global markets can heave a sigh of relief. Had the deal not been inked, the US government would have defaulted on loans and regular payments. With the US dollar still the nucleus of the global financial markets, the outcome would have been disastrous.
Fortunately, that worst-case scenario is out of the way. It must be underlined that this is not a deal, but just an in-principle deal and the text of the deal still has to be reviewed and passed by the members of the Congress. However, with President Biden and House Speaker Kevin McCarthy giving the go-ahead, the actual approvals should just be a matter of academic formality.
Gist of the debt deal in the US
At the outset, this is not a deal to hike the debt ceiling but to suspend the debt ceiling for the next 7 quarters. Let us look at what the debt deal really entails.
Apart from these, there are other IRS related cuts to ensure that the wealthy and the well-heeled do not get away by paying less tax. These are likely to be more populist in nature.
What the debt deal does not do?
It has been weeks and months of hard negotiations before the debt deal has agreed on key areas. However, there are a number of items that the parties could not agree upon. Here are 3 such specific areas that the debt deal does not cover.
It looks like a quick compromise hammered out by Biden and McCarthy, which buys time for now. However, it must be remembered that this is just an in-principle deal.
Just an in-principle deal; that’s all
The deal had to happen, even if there was no common ground. Neither Biden, nor McCarthy could be seen as precipitating a debt default by the US government. So, that is the sub-text. This is not a debt ceiling deal. It is not that the debt ceiling has been increased beyond $31.4 trillion. The debt ceiling has been suspended till the first quarter of 2025. That is something the ruling Democrats could have done under Constitutional powers, but this looks lot better.
For now, the treasury can function up to 05th June and if the COVID fund clawback is also considered, the treasury can go on for longer. This is the first debt ceiling debate that went close to the wire. Both Republicans and Democrat governments have lived beyond their means in the last 25 years. What the debt deal could do is to ensure that the debt ceiling does not go through the roof. Keeping non-defence spending flat for 2 years would, at least, force the US government to cut its coat according to the cloth.
Global markets will heave a sigh of relief
Between now and June 05th, it should be more a case of stage management. Biden aptly described this debt ceiling suspension agreement as a compromise that was good for the United States and for the world. At least, this agreement prevents a catastrophic default that could have led to an economic recession, and left millions of Americans on the brink. However, the real struggle would be to pass this bill. Remember, the Republicans control the House (222 to 213), while Democrats control the Senate (51 to 49). The key would be to convince the die-hards on both sides, as it does look like too much of a compromise.
Emerging markets like India would surely heave a sigh of relief. In a worst case scenario, debt default by the US would have created chaos in global financial markets and thrown bond yields off tangent. As Biden put it, a debt default would have precipitated a recession in the US. For a country like India, which runs its largest trade surplus with the US, a default would have been bad news. India’s robust services exports in FY23 were dominated by IT sector exports. The US recession would have meant a sharp fall in tech spending, limiting the ability of IT companies to boost the export engine. Above all, it does not create chaos in the dollar markets, something India had always dreaded. For now, it is time to smoke the pipes of peace.
Related Tags
Invest wise with Expert advice
IIFL Customer Care Number
(Gold/NCD/NBFC/Insurance/NPS)
1860-267-3000 / 7039-050-000
IIFL Capital Services Support WhatsApp Number
+91 9892691696
IIFL Capital Services Limited - Stock Broker SEBI Regn. No: INZ000164132, PMS SEBI Regn. No: INP000002213,IA SEBI Regn. No: INA000000623, SEBI RA Regn. No: INH000000248
ARN NO : 47791 (AMFI Registered Mutual Fund Distributor)
This Certificate Demonstrates That IIFL As An Organization Has Defined And Put In Place Best-Practice Information Security Processes.