Civil servants without pay, a sharp drop in the stock market, serious turmoil in global economy… What are the consequences of stopping payments USAthe world’s largest economy unless Republicans and Democrats agree to raise the borrowing limit?

For Americans

“All Americans who receive money directly or indirectly from the government will stop receiving money,” explains Gregory Dako, chief economist at EY Parthenon.

This includes salaries and pensions for federal employees and the military, as well as child benefits, sickness benefits, and benefits for the elderly and low-income citizens.

The Treasury risks “not having the liquidity to pay hundreds of billions of dollars,” says Nancy Vanden Houten, an economist at Oxford Economics.

And “businesses that have signed contracts with the government will also no longer be paid,” Dako adds.

In addition, “if stock markets fall, (…) people’s savings and retirement savings will suffer,” said Nathan Sheets, chief economist at Citigroup.

For global markets

“From the point of view of financial markets, there will be huge stress,” Dacko emphasizes.

In 2011, when the US narrowly avoided default, the New York Stock Exchange crashed and the S&P 500 plunged “from 13% to 14%,” he recalls.

What will cause the most disappointment: the fact that the US will not be able to redeem its government bonds. “Will international investors decide to back off and not invest anymore?” Dako asks.

Investors are already more wary of US government bonds maturing in June, US Treasury Secretary Janet Yellen recently warned.

If US bond prices collapse, “the situation will be catastrophic for all organizations holding large amounts of US government bonds, such as banks, pension funds, insurance companies,” said Eric Dorr, director of economic research at IESEG.

In addition, the dollar “will be heavily devalued,” he adds.

But the global financial system “depends on the stability of the dollar,” the Center for American Progress emphasized in a May 11 report.

As in 2011, gold could be a big winner as it provides a safe haven if default is threatened, said Cresset Capital’s Jack Eblin.

For the American economy

“The economic effect is simply caused by the fact that the government stops spending money,” notes Dako.

Household consumption is the driving force behind the US economy. However, as Dako points out, if public spending is cut, this means that “a family that will not be paid (…) will not be able to consume while shopping, which (…) will affect the store in which they shop.” which will then influence his hiring decision”…

In addition, since the US government will not be able to pay companies that provide services to it, “these companies will be threatened (…) with bankruptcy,” adds Dorr.

The economic and fiscal fallout could cost the US economy 5% of GDP, Dacko estimates, speaking of a “huge shock.”

For the global economy

The effects of the US financial crisis could quickly spread globally.

Especially since interest rates on “US bonds will rise sharply”, which will set off a chain reaction of “declining corporate and household investment, as well as consumption, leading to a severe recession in the US”, which could spread “to Europe and elsewhere,” says Dorr.

“I don’t think global growth or U.S. economic growth will be significantly affected this year,” Est estimates.

Paradoxically, the situation could benefit some U.S. exporting companies as a dollar depreciation “will increase demand for their products because they are cheaper,” according to a May 2 estimate from the Council on Foreign Relations.

^{Source: APE-MEB, AFP.}