With Democrats and Republicans still unable to reach an agreement, we are once again approaching the debt ceiling. What would be the consequences if no agreement is reached? What is the debt ceiling? Wealth A7 gives you the facts.

Where did the debt ceiling come from?

In 1917, as the United States entered the First World War, the US Treasury had to issue debt to finance the war effort. Parliamentary approval was required for each issue and this became an impediment to efficiency during these times. It was to facilitate the financing of the US Treasury that the Debt Ceiling Act was passed. From then on, only the increase of this ceiling will require the vote of the Congress.

Since then, the ceiling has had to be raised on numerous occasions. In 2011, under the presidency of Barack Obama, the first serious crisis related to the debt ceiling occurred. As the vote took place less than 48 hours before default, the S&P rating agency decided to downgrade the US from AAA to AA+. This vote has become increasingly political over time as it has been used as leverage to influence the government's budgetary decisions.

What is the risk if there is no agreement?

Against the backdrop of domestic political tension, we are facing this situation again today with a deadline of 5 June 2023. With the $31.4 trillion ceiling reached, negotiations are ongoing but no agreement has been reached. The immediate consequence on that date would be that the US would be unable to pay its bills, wages and creditors.

In 2011, despite a vote to avoid default, the threat faced caused a loss of confidence in US political institutions. This was reflected in the downgrading of their ratings and the fall of the financial markets.

This is why the absence of an agreement has left specialists around the world fearing the worst. In addition to the internal consequences in the United States, the explosion would impact the world's financial markets as well as the price of raw materials, including oil, given the major role played by the dollar, the reference currency. All the financial institutions are asking Congress to find a solution to avoid this situation because it is a leap into the unknown for the whole world.

This situation is complex and confirms the interdependence of economies. For these reasons, the choice of UCITS or shares is difficult and deserves the support of specialists. Wealth A7's advisors are there to identify your needs, listen to your expectations and make you an appropriate proposal, contact us!

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