The US Could Default On Debt: But What Does This Even Mean? 

You have heard it before, so one more time will not hurt. The US is cruising along to default on their debt if an agreement to raise the debt ceiling is not reached between president Joe Biden and Congressional Republican leaders. 

Both sides though have expressed confidence that a deal would be hammered out soon. But time is running out, and the tentative deadline beyond which the US may not have adequate cash is June 1 (though knowing the exact date – called the X-Date – is impossible).

Why is this debt important?

But what is this debt, currently standing at $31.1 trillion? The US government must borrow to fund the difference between what it spends and receives (jargon alert: it's called a deficit). This debt trades as a promissory note called a treasury or T-bills. 

Nearly 30% of this debt, or close to $7.4 trillion, is actually owned by foreign bodies, including governments. They do so to park their excess dollars for some added interest, but also to serve as an asset constituting their own foreign reserves. 

Who owes whom how much?

The Japanese hold the most, at $1.1 trillion, nearly as much as pension funds in the US do. 

Next, the Chinese own $859 billion worth of it. The Chinese government has been accused by former President Trump of using this debt as a tool to "manipulate" their currency. 

After the United Kingdom and Belgium, tax-havens Luxembourg, Switzerland and the Cayman Islands follow with around the $300 billion mark. 

Indians come a few spots below them at $232 billion, sitting above Hong Kong, Brazil, Singapore and France. 

 

What do these numbers mean?

These numbers simply show the holdings of India and other countries of US treasuries. This does not mean that they are all maturing around X-Date. Or that quantum of a sunk investment in case of a default. 

But it does give an indication of the domino effect lined up. Think of it this way: the mere thought of a default has sent up yields of those treasuries maturing around June 2023 by around 20%, the White House states. And higher yields are not a good thing for a borrower, as their creditworthiness is seen as riskier. The floodgates will open for a global contagion of panic. Let alone the unquantifiable hammering to American reputation abroad. 

And this maybe the tip of the iceberg, as this event is unprecedented. 

Secretary of the US Treasury Janet Yellen  calls the looming default a potential catatrophy. Right she is.