Home » World » US Debt Ceiling Crisis Averted: Relief Only Temporary? Experts Weigh In

US Debt Ceiling Crisis Averted: Relief Only Temporary? Experts Weigh In

In the past few days, the crisis regarding the US debt ceiling (Debt Ceiling), which has filled the entire global financial sector with anxiety and concern, is reported to be averted. On Saturday night, negotiations between the White House representatives and the opposition Republican Party indicated that a compromise formula had been formed. President Joe Biden and Republican Party leader and Speaker of the US House of Representatives, Kevin McCarthy, reached an agreement to resolve the debt ceiling crisis during an hour and a half phone conversation.

According to foreign media reports, the two sides have agreed in principle that the maximum borrowing limit should be raised for two years and instead of this, spending should be restricted within the current limits in areas other than defense for two years. Kevin McCarthy said that after discussing with Beden once again on Sunday, it is scheduled to vote on the related bill by Wednesday. 31.4 trillion dollars (31.4 lakh crores), the current debt ceiling of the United States. The debt ceiling is defined as the total amount that the US government can borrow to cover various bills and administrative expenses. At the same time, experts suggest that the benefits to the market from this are only temporary, although there is an agreement to avoid a crisis where bills are returned without sufficient funds and falling into a serious debt trap.

Is the relief only temporary?

business" ,"subscn" : "business_news" ,"storyID" : "100569620" ,"templatetype" : "articleshow" ,"BL" : "0" ,"hb_wrapper":["rubicon"]" data-slot="/7176/AMP_MLY_Mweb/MLY_AMP_Business/MLY_AMP_Business_FC" data-multi-size="300x250,300x480" width="300" height="600" data-multi-size-validation="false" data-loading-strategy="1.25" layout="fixed" type="doubleclick" class="i-amphtml-layout-fixed i-amphtml-layout-size-defined" style="width:300px;height:600px;" i-amphtml-layout="fixed"/> It is a positive factor that the ruling party and the opposition came to an agreement to avoid the crisis without going into debt trap. What needs to be done is to quickly pass the bill to raise the borrowing limit without any further hurdles. Then by June, administrative bills will be returned without money. This will give the US Federal Reserve more courage to raise interest rates if needed to control inflation. While these may appear to be positive factors overall, this relief for financial markets may not last long, say experts.

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Because once the borrowing limit is raised, the US Treasury will soon hit the market with new bonds to raise money. Through this, billions of dollars will be transferred out of the market and into the system. Multinational financial services firm JP Morgan expects that 1.1 trillion dollars (1.1 lakh crore) of new treasury bills (T-bills) will enter the market within the next 7 months. This is a relatively high amount in a short period of time. Also, new treasury bills are likely to be issued at higher interest rates.

Therefore, this may adversely affect investments in the banking sector. Investments by private companies and others will be attracted from banks to government bonds because of higher interest rates and greater security. This may intensify the current trend of fund outflows from the bank. Liquidity in the banking sector will also be adversely affected. This will increase the cost of loans and term bonds in the medium term. The financial burden on companies already struggling with high interest rates will increase. All these are setting the backdrop for market correction.

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What next?

If the new treasury bills introduced to the market after raising the borrowing limit are mostly bought by money market mutual funds, the negative impact on financial markets will be limited. However, if private companies and individuals withdraw their deposits from banks and increasingly come forward to buy new treasury bills available at higher interest rates, the scenario could lead to a significant reversal. Especially at a time when America’s local banks are being challenged. In short, the market has not fully grasped the liquidity crunch due to more Treasury bill issuance. Therefore, market experts are looking forward to solving the problem posed by the US debt ceiling through a solution that does not shake the market.

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2023-05-28 11:34:00

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