US debt limit crisis: Rise in market bets on probability of default
EXPLAINED: What's US debt ceiling & why is it such a big deal?
Will the US default on its debt? That's the biggest question that everyone's asking right now. And if financial markets in the United States are to be believed, the risk of a default has risen.
The cost to insure against the US defaulting on its debt has jumped, amid the stalemate in Washington DC over the debt ceiling limit.The cost stood at 73 basis points, up from 72 basis points on Tuesday. This is the highest level since 2009.
As per one analysis,the probability of default isdouble the level from two months earlier and nearly 10 times higher than at the beginning of 2023.
A market measure called credit default swap, or CDS, is used to understand investors thinking on a country's ability to repay its debt. The current CDS levels for the United States have only been seen by developing economies and junk-rated nations. This shows that investors have lost confidence the United States ability to repay its debt.
The cost is now equal to what it is for Greece, Brazil and Mexico, which have defaulted many times. These countries have a credit rating many rungs below the investment grade rating of the US.
Meanwhile, US President Joe Biden said that Congress needs to move fast to increase the $31.4 trillion debt ceiling.
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"Because if we default on our debt, the whole world is in trouble. This is a manufactured crisis. There's no question about America's ability to pay its bills," said Biden.
The X-date is fast approaching when the world's largest economy could run out of money to pay its bills. Treasury Secretary Janet Yellen believes that could be as early as June 1.
Wall Street executives who have advised the US Treasury's debt operations for the past 25 years said on Tuesday that any delay on bond payments by the Treasury would be an event of "seismic proportions" for financial markets and the economy.
Moody's Analytics has assigned a 10 percentprobability that the debt limit would be breached. "What once seemed unimaginable now seems a real threat," it said.
Politicians are really running out of time and will need to come to a consensus soon. The political posturing and war of words will only make investors more nervous between now and June 1.
(With agency inputs)