Hanging the sword of default: The deadlock over the US debt ceiling stirs up global financial markets

The upper limit of the US debt was restored to 36.1 trillion US dollars on January 2, 2025, triggering political deadlock within Congress and widespread concerns in the market. The Congressional Budget Office (CBO) estimates that if Congress does not take action, the United States could face a technical default as early as August 2025 and might even run out of borrowing space by the end of May. The US Treasury Department reported that the federal deficit in the first half of fiscal year 2025 had reached 1.31 trillion US dollars, an increase of 23% compared with the same period last year. Meanwhile, market interest rates rose sharply, the inversion of the US Treasury yield curve intensified, and investors began to have doubts about the solvency of US Treasuries. S&p Ratings has warned that budget "tricks", tariff conflicts and rising debt levels have undermined the fiscal outlook, raising the risk of a downgrade. To avoid default, Congress is considering raising the debt ceiling through Reconciliation procedures or one-off bills and seeking bipartisan cooperation in the supporting reforms. If the deadlock persists until autumn, the Treasury bond market auctions and the operation of the Federal Reserve's balance sheet will face serious disruptions. The global financial market is highly sensitive to this. The US debt crisis may affect international capital flows and exchange rate stability.

According to the report of the Congressional Budget Office, since the debt ceiling was restored to 36.1 trillion US dollars on January 2, 2025, the Treasury Department has won a temporary buffer for government operations through short-term cash management measures, including delaying payments to trust funds and issuing variable-rate securities, etc. However, these "extraordinary measures" are expected to last only until the end of summer or early autumn in 2025. Once the buffer is exhausted, the government will be unable to support its existing legal obligations, including social security, medical insurance and defense expenditures. Meanwhile, the non-discretionary spending of the federal government has continued to rise, with interest payments alone accounting for the majority of the federal budget. The historically high cost of debt has put pressure on the overall fiscal sustainability.

on February 21, 2025, the Senate passed S. Con.res.7 by a vote of 52 to 48, presenting a package of budget instructions for the use of harmonization procedures. The package includes an increase in the debt ceiling by up to 4 trillion US dollars, and under this framework, 175 billion US dollars will be allocated for immigration and border enforcement, and 150 billion US dollars for the growth of defense spending. The Senate passed the revised H.Con.Res.14 on April 5th, raising the debt ceiling to $5 trillion and demanding a $500 billion spending cut over the next ten years. This plan has been adjusted in both spending cuts and debt limits compared to the House version, and has drawn opposition from two Republican senators.

on February 25, 2025, the House of Representatives passed H.Con.Res.14 by a vote of 217 to 215, also authorizing a $4 trillion increase in the debt ceiling and supporting tax reform and spending cuts. However, due to the differences between conservatives and moderates over cuts in healthcare and social security, there was a period of controversy on the eve of the vote.

Recently, market concerns over the risk of US debt have been on the rise. The yield of US Treasuries has soared and the curve inversion has intensified. Investors have successively reduced their demand for long-term US Treasury bonds, and the risk-averse sentiment has once again heated up. Standard & Poor's has warned that the federal government's reliance on budget "tricks", unbalanced trade tariff policies and high total debt will pose a substantial threat to the credit of the United States. If the agenda remains on hold, the possibility of a credit rating downgrade will increase significantly. Another prediction is that the market has fixed the probability of a US government default at 6%, highlighting the market's concern that the political deadlock will affect the stability of the bond market.

As the most liquid sovereign bond in the world, the challenge to the safe haven status of US Treasuries will trigger a chain reaction. The holdings of major central banks and sovereign wealth funds around the world may be reconfigured, increasing the allocation ratio to European bonds and emerging market bonds. Fluctuations in the US dollar exchange rate may also exacerbate the instability of emerging market currencies, thereby impacting global trade and capital flows

The Conference Board report pointed out that if the debt limit deadlock persists until the autumn of 2025, the Treasury bond market auctions will encounter significant disruptions, the Fed's balance sheet operations will also be severely affected, and both short-term liquidity risks and long-term borrowing costs will rise significantly. Technical default will not only lead to the stagnation of government payments, but also may trigger a chain run on hedge funds and the banking system.

The recent US debt crisis is not only the product of political differences but also reflects the deep-seated challenges facing the fiscal sustainability of the United States. In the short term, how Congress reaches a compromise between the debt ceiling and budget reform will determine whether a technical default can be avoided. In the medium and long term, the United States urgently needs to reform the healthcare, social security and tax systems to curb the growth rate of debt and restore investor trust. Once the international community's confidence in the sovereign credit of the United States wavers, it will have a wide-ranging impact on global financial stability. Only on the basis of bipartisan cooperation and institutional innovation can stable expectations and sustainable growth momentum be provided for the US and global economies.