If the US defaults on its debt, how will it affect the world economy?

The debt crisis in Washington, if it results in a federal debt default, will have far-reaching consequences globally. The first-ever debt default will affect Chinese factories that sell electronics to the US, Swiss investors holding US Treasuries, and Sri Lankan companies that can no longer introduce the dollar as an alternative to their country’s risky currency. According to Moody’s Analytics, if the US defaults and the crisis isn’t resolved quickly, “no part of the global economy will be spared.”

The analysis by Moody’s Analytics found that if the US debt ceiling were breached within a week, about 1.5 million jobs would disappear. Moreover, US economic growth will slow, 7.8 million US jobs will disappear, borrowing rates will skyrocket, and unemployment will rise in case economic growth were to continue all the way into the summer. This could wipe out $10 trillion in household wealth.

The US debt, which was once considered ultra-safe, is the foundation of global trade built on decades of trust in the United States. If it collapses, it could freeze financial markets, trigger a global crisis, and collapse the $24 trillion Treasury bond market. A debt default is likely to have a dramatic impact on US and global financial markets, as warned by an international economist and former Chief Economist of the International Monetary Fund.

The US dollar accounts for 58 percent of the foreign exchange reserves held by central banks around the world. The IMF reports that from 1999 to 2019, 96 percent of trade in the Americas was billed in US dollars. So did 74% of Asian trade. America’s currency is so reliable that in some volatile economies, merchants demand payments in dollars rather than in their own currency.

A debt default could trigger the rise of the dollar once again because of uncertainty and fear. However, the US will continue to make interest payments to bondholders and other obligations if the debt ceiling is breached. Still, this will not be enough to avoid a slight easing around June 15th.

The debt ceiling drama is sure to raise questions about the enormous financial power of the US and the dollar. “The global economy is in a very fragile situation right now, so it would be incredibly irresponsible to throw a crisis over the creditworthiness of the U.S. debt into this situation,” as warned by an international economist.

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