Government debt is going to the roof
The United States is on the verge of a technical default on debt obligations. Treasury cash could run out as early as June 1, Treasury Secretary Janet Yellen has warned. «We are far from completing negotiations to raise the debt ceiling,» House Speaker Kevin McCarthy said, confirming the seriousness of the situation. Legislative delay is fraught not only with a default for the United States, but also with a budget crisis, and for the rest of the world — a collapse in stock markets and a full-scale recession. How will these events affect Russia?
Formally, this story (more precisely, the next page of the endless legislative and financial saga) began on January 19 of this year, when the US national debt exceeded the legal ceiling of $31.4 trillion, or about 13% of annual GDP. And then the US Department of the Treasury began to apply special accounting measures to stay within this astronomical amount.
In April, the Republicans put forward their bill, which provides for an increase in the debt limit by $1.5 trillion, and at the same time – reducing government spending by $4.5 trillion, as well as limiting their growth to no more than 1% per year. The document passed the House of Representatives (controlled by the Republican opposition), but did not receive approval from the Democrats in the Senate. They demand to raise the ceiling without any conditions.
However, let's not abuse the terrible term «default». Most politicians and economists agree: America will avoid it because the ceiling will eventually be raised. Question – When? The last time the bar was moved to a new height in 2021, and then the situation was resolved by a simple vote on the relevant bill, since the majority in the House of Representatives and the Senate was for the Democrats. Today, the alignment of political forces is completely different.
Recall that the US public debt – it is the federal government's debt to its creditors. Expenses of the treasury, traditionally exceeding revenues, are covered by the Ministry of Finance through loans, issuing special treasury papers – treasures. They are bought by American and foreign investors, receive a stable income from them, in fact, lending their money to the US economy. The national debt began to increase sharply in 2020 due to the high spending of the authorities to combat the consequences of the covid pandemic. From January to December, it added almost $4.5 trillion, although before it grew by no more than 1.5 trillion a year. Against this background, the budget deficit more than tripled and reached $3.1 trillion. However, since then, the state has managed to even out the situation and achieve a surplus.
In 2017, when the United States entered the First World War, Congress for the first time set a borrowing ceiling – limit on the issuance of war bonds. It has been raised 78 times since 1960 alone.
In 2011, it was possible to agree on this (and avoid a technical default) only three days before the onset of the «deadline». Doubts about the creditworthiness of the world's largest economy then led the S&P rating agency to downgrade the US credit rating by one notch for the only time in history – from the highest AAA to AA+, and the S&P 500 broad market index fell 17% in two weeks. The compromise was eventually reached after President Barack Obama's administration agreed to cut defense and other spending. World stock markets then thoroughly shook, their main indices collapsed noticeably. Falling in price (up to 10%) on the London Stock Exchange and the securities of the largest Russian companies by market capitalization. True, since then a lot of water has flowed under the bridge, and today's Russia — fortunately or unfortunately, it can no longer be considered an integral part of the global economy and financial system.
Two worlds — two defaults
In its recent history, America has never experienced a classic default associated with an objective inability to pay its debts (like Russia in 1998). This happened only in 1790, 1861, 1933, and in 1979 there was a technical (situational) default due to a temporary lack of money in the accounts of the US Treasury. Investors see this as a delay, but not bankruptcy, and react in a stereotyped way: they leave long bonds and other risky assets for safer ones (short bonds, cash and gold).
Paradoxically, the most powerful protective tool in a technical US default remains the dollar. Its index (DXY) and the US dollar exchange rate showed growth at the peak of the 2011 panic, while other assets became cheaper.
For the ruble, the bond with the dollar is usually realized through fluctuations in the price of oil, but today it is divorced from exchange rate formation: due to sanctions, the ruble is more affected by the volume and geography of supplies than the price of a barrel of Brent. As a result, the impact of the US default – at least technical, at least actual – may turn out to be absolutely neutral for our country.
“The probability of an American default is negligible,” says financial analyst Sergei Drozdov. – All the current fuss around the national debt limit – nothing more than the subject of eternal ritual bargaining between Democrats and Republicans. And, although both parties are trying to extract maximum preferences for themselves, they clearly do not intend to act to the detriment of their country. With a very high degree of probability, the ceiling will be agreed upon, and if not, the States will face a shutdown in the worst case: the government will partially stop working, and employees will be sent on forced leave.
This is far from the situation of 1998 in Russia, when the state treasury was empty, and there was nothing to pay creditors with. Another thing is that the delay increases the atmosphere of nervousness in the debt and financial markets – both in the United States and in the world.
Russia, due to the sanctions war with the West, cut off from the global financial system, has nothing to fear. And even if the dollar begins to lose ground against other currencies, this is unlikely to have any effect on the ruble exchange rate, which today is formed under the influence of very peculiar, purely internal factors.
As Drozdov recalls, last year's events became a vivid example: while the dollar showed growth, against the background of the Fed's rate hike, the ruble strengthened. And its exchange rate dynamics was influenced by completely different circumstances, such as geopolitics and investors' fears about the imposition of sanctions by the West against the National Clearing Center (NCC). So direct parallels are inappropriate in this case.
“The farce unfolding before our eyes with an increase in the US government debt limit does not deserve serious attention,” says Vladislav Inozemtsev, director of the Center for Post-Industrial Society Studies. — It could be a good chance for speculative play on the stock exchanges, but it would be naive to believe that the Americans can orchestrate a default on treasury bills (treasury bonds), which the government never announced. The problem itself seems to me sucked from the finger. USA Today – it is the only country in the world that has such a hard limit. In addition to it, only Denmark has a law that establishes the ceiling of public debt in absolute terms, but its current limit is much higher than the real values.
Let's say, if we take the European Union, then during the transition to the euro it set the criteria for membership in the eurozone to keep the member countries' budget deficit within 3%, and the public debt – 60% of GDP. This norm has been violated by individual EU countries for more than two hundred times, and the ratio of public debt to GDP for the euro area is now about 90% (20 out of 27 EU countries are outside the criterion). No one makes a tragedy out of this, notes Inozemtsev. And in Russia, where the public debt is very low, the limit itself also exists, and is indicated in each federal budget – but revised as needed, as casually as the rest of the budget.
“In America, this tool was not supposed to limit the federal authorities, but, on the contrary, give them more freedom, since before its introduction (at the beginning of the 20th century), the Treasury had to coordinate with Congress every bond issue,” explains Inozemtsev. — However, in the last 50 years, the ceiling has become a problem created from scratch. At the same time, its parameters are not of decisive importance for the United States, since since the late 2000s, the most important (and since 2020 – almost the only) buyer of new issues of treasury bills has been the Federal Reserve System.
And the Fed always gives money to the government without increasing dependence on the outside world, and besides, it returns to the budget in the subsequent tax period most of the interest paid by the Treasury on these bonds.
Against this background, the announcement of a default would look like madness: this step would collapse the quotes of all American obligations – not only government, but also corporate, would undermine the ability of the Fed to regulate economic activity by changing the base rate, and would cause a series of bank collapses. And most importantly, there is no benefit from it, which is well known to representatives of both parties.
Therefore, there is no doubt that the parties will agree, and the ceiling of the state debt will be raised once again (although it would be much more correct to cancel it long ago , as Australia did in 2013).
The only question is whether it will be possible to meet the deadline before June 1, or the auction will drag on for another month or two. According to the Congressional Budget Office, the government remains able to avoid stopping debt payments until the end of August by using reserves and temporarily cutting funding on a number of unprotected items. In a word, sums up Inozemtsev, sooner or later the Americans will decide their «paper» problems that Russians shouldn't bother with at all.
“The current story with the debt ceiling is typical for the United States, there is nothing extraordinary in it,” says Nikita Maslennikov, a leading expert at the Center for Political Technologies. – The approaching start of the presidential race gives it an increased emotional and speculative coloring.
Almost every head of the White House faced the need to solve this problem: for example, Clinton and Obama had two episodes each. And it happened that the Ministry of Finance did not finance the government for up to a month. But the result was always the same – Democrats and Republicans found a compromise. Now they will find it too — for example, by increasing the ceiling by $1.5 trillion (in exchange for cutting government spending). Moreover, a certain safety cushion has been created: over the seven months of the fiscal year, the US budget surplus grew 2.6 times year-on-year, amounting to $176 billion in April. This will allow it to last at least until the end of June.
So far, international rating agencies are not prone to panic. Although they admit that if the resolution of the issue drags on for another week, this may lead to “outbreaks of volatility”; in the stock markets. Plus the additional burden will fall on the dollar, but will it weaken as a result or not – big question.
As for the potential impact on the Russian markets and the ruble, Maslennikov sees it as indirect (through the dynamics of the dollar) and extremely insignificant. In the opinion of the “MK” interlocutor, experts in the United States themselves are mainly demonstrating an alarmist mood today. For example, economists at the Brookings Institution believe that questionable debt ceiling maneuvers lead to fiscal chaos.
Under the blow were the main items of government spending of the country: health insurance (25%), pensions and benefits (20% each), defense (13%) and interest payments on public debt (8%). And the White House Council of Economic Advisers warns that if the US fails to pay its obligations long enough, GDP will fall by 6.1% and unemployment will rise by 5%. As a result, the economy will suffer more than in the last financial crises of 2008 and 2020.
Meanwhile US public debt is the main reserve asset in the world: almost 60% of savings are kept in dollars (20% in euros). , 5% each in yen and pounds, 3% in yuan). The global financial system is based on the axiom that Washington will never default on its dollar obligations, as long as it prints as much as it needs. US government bonds are considered benchmarks in terms of risk. So a default, despite the improbability of such a scenario, will have not only purely economic, but also psychological consequences.