Default - a real threat for the US

The United States risks running out of cash to pay its obligations by mid-July unless Congress adopts a resolution to raise or suspend the maximum national debt ceiling, according to an analysis published by the Bipartisan Policy Center think tank, taken over by Reuters, the Associated Press and the American media.

This deadline, known as "date X", is the moment when the US government can no longer honor the payments due and could default. It is a fiscal milestone closely watched both in Washington and on Wall Street. However, the exact estimate of date X is uncertain. It depends on how much room the Treasury Department has to maneuver to apply the so-called "extraordinary measures" - accounting tricks through which funds can be redistributed to maintain government payments. According to the Bipartisan Center, this deadline could be pushed back even to early October.

Under these conditions, economic and financial experts expect that negotiations between Republicans and Democrats to resolve the debt ceiling issue will represent the main objective of the US Congress in the coming period, in the context in which Republicans want to adopt massive tax cuts, worth trillions of dollars.

The above situation has been a constant since the economic crisis of 2008-2010. According to the graphs presented in the analysis prepared by the Bipartisan Policy Center, since 2011, periodically, every two or three years, the US has faced the same problem of increasing or suspending the maximum public debt ceiling, and Congress has always made a decision in this regard, but at the last minute, when financial markets showed signs of nervousness. According to the cited source, the situation also occurred in 2023, when, after a long political struggle, in June of that year, congressmen agreed to suspend the debt ceiling - which had then reached 31.4 trillion dollars - until January 1, 2025.

Currently, the national debt exceeded 36.1 trillion dollars in January 2025 and is approaching 37 trillion dollars. While Republicans have reduced the number of employees in government agencies and expressed their intention to limit unnecessary spending, few have shown any willingness to cut social programs, which are the main drivers of debt growth.

"Policymakers need to take a responsible approach to the budget, which means, first and foremost, avoiding confrontations over the debt ceiling and the negative impact on the economy," said Margaret Spellings, president of the Bipartisan Policy Center.

The analysis also shows that the deadline could be influenced by unforeseen spending for natural disasters, the pace of tax collections in 2024, as well as additional revenue generated by tariffs imposed during the Trump administration. Savings from spending cuts recommended by the new Department of Government Efficiency could also push back the X date.

• Treasury Secretary Awaits Congressional Action "to Protect U.S. Fiscal Credibility"

Earlier this year, Janet Yellen, the Treasury Secretary under President Joe Biden, informed Congress that, starting January 21, the department would begin implementing "extraordinary measures" to allow the United States to continue to meet its fiscal obligations. These measures are essentially accounting tricks - such as suspending certain investments in government employee pension funds - that help avoid exceeding the debt ceiling.

In the past, Donald Trump has called the debt ceiling a "trap" set by Democrats and has urged Congress to either raise the borrowing limit or eliminate it entirely. Meanwhile, Scott Bessent, Trump's current Treasury secretary, was skeptical about eliminating the debt ceiling during his January hearing. However, he said he would consider the idea and could work with Democrats on a possible reform, given that many of them see the limit as unnecessary risks. In a recent letter to Congress, Bessent said he had continued measures Yellen had begun, such as suspending investments in pension funds for civil servants and postal retirees. The US Treasury secretary has promised Congress a new report in May on the duration of the funds available and stressed that there is "inevitable uncertainty" about such estimates.

"I respectfully urge members of Congress to act promptly to protect the fiscal credibility of the United States," he wrote.

The sources also indicate that in February, Republicans in the House of Representatives presented a budget proposal that provides for raising the debt ceiling by $4 trillion and approving tax cuts of a similar amount. It remains to be seen how many Republican senators will support such a measure or whether it will need the support of some Democrats for its adoption. Especially since Republicans are preparing a legislative package of proportions, which includes tax cuts in the order of trillions of dollars and substantial amounts for defense and border security. However, many fiscal conservatives in the party refuse to support an increase in the debt ceiling, even if it would lead to insolvency. If a joint budget agreement is not reached between the House and Senate, the US risks economic instability, credit downgrades, and delays in payments to retirees, government employees, and federal contractors.

• How can the Treasury act if a decision by Congress is delayed?

We note that in the past, just approaching X Date has led to increases in borrowing costs for the US government, declines in US and global stock markets, and even downgrades in the US credit rating. In 2011, Standard & Poor's downgraded US sovereign debt for the first time, and in 2023 Fitch did the same, citing repeated crisis scenarios and lack of fiscal responsibility. These decisions were accompanied by additional costs of hundreds of millions of dollars for taxpayers, since bonds issued before the ceiling was lifted had higher interest rates due to the perceived risk. In addition, the indirect effects on states and local authorities are considerable. During such a shutdown, the Treasury suspends the issuance of special government bonds used by local governments for fiscal compliance, forcing them to resort to costly solutions. Amid such uncertainty, investors are moving away from government debt maturing close to X Dates, and financial markets are becoming increasingly tense.

If Congress does not act before the extraordinary measures and cash reserves are exhausted, the US Treasury will be forced to choose between two disaster scenarios. The first is "prioritization" of payments, that is, the daily selection of bills to be paid - a technically possible but highly controversial procedure that involves choosing "winners and losers", generating public discontent, administrative chaos and legal risks. The alternative is to postpone all payments until the amounts needed to fully honor one day of obligations have been accumulated - a solution that, although less controversial, creates cascading effects, chain delays and a loss of confidence in the American state as a reliable debtor. Regardless of the approach, the economic impact would be immediate. Service providers would not be paid on time, welfare recipients and government employees would suffer salary delays, and consumer and business confidence would be seriously affected. Financial markets could react violently, and the US's financing costs would increase significantly, in the long term. The analysis by the Bipartisan Policy Center draws attention to the risky fiscal measures desired by President Donald Trump. Thus, experts from the center warn that if tax revenues collected in April are lower than expected, the government could run out of cash even earlier, that is, in June. The experts cited also show that a more precise estimate of the X date will be issued after the collection of most tax returns in April, but that there are other factors that can influence this date, factors that include the performance of the US economy, the new customs duties that are expected to take effect on April 2, the new laws adopted and the possible positive performance in reducing budget spending by the Department of Government Efficiency, led by Elon Musk.

• US public debt, constantly increasing

The analysis also shows that the Trump Administration is still relying on tax revenues in June and September, periods in which companies and self-employed workers contribute billions of dollars to the state budget. The Treasury could also expand its borrowing capacity using federal pension funds.

Until then, however, in April the Congressional Budget Office (CBO) is to publish its own estimate of the debt ceiling, and Treasury Secretary Scott Bessent will come up with a similar assessment by mid-May. But the real source of panic is another: what happens if the Trump-era tax cuts become permanent? The tax cuts and jobs bill, one of the former president's main economic policies, expires at the end of this year. Trump and most Senate Republicans want to extend it. But according to the CBO, this decision could have devastating consequences. According to economic and financial analysts cited by the American publications Fortune and The Hill, if the law is maintained without further adjustments, the US public debt would exceed 214% of GDP by 2054. In the scenario in which borrowing costs increase by just 1%, the debt would reach 204% of GDP in 2047 and exceed 250% of GDP in 2054. They also point out that interest payments alone already cost the US more than $1 trillion annually - more than the Pentagon budget - and this amount will continue to grow. The Peter G. Peterson Foundation warns that the negative macroeconomic effects will lead to even higher interest rates, worsening the budget situation.

However, even in a scenario where the Tax Cuts and Jobs Act expires at the end of 2025, the CBO estimates that the debt will reach 166% of GDP by 2054.

A White House official told Fortune that the Trump administration's plan focuses on supply-side reforms, such as expanding energy production, deregulation and spending cuts, that will boost the tax base and reduce inflation, giving the Federal Reserve room to cut interest rates. Trump also wants to raise revenue through tariffs, arguing that the tariffs imposed on China during his first term brought in hundreds of billions of dollars without hurting inflation or economic growth.

However, for now, no one seems to be answering the key question: what happens if the US debt exceeds 200% of GDP? Penn Wharton University's budget model warns that that threshold signals "unsustainable" debt. The October 2023 report indicated that the U.S. cannot afford a debt of more than 200%, even under ideal economic conditions.

A more realistic scenario places the limit at around 175% of GDP. Above that level, everything depends on investors' confidence that the U.S. government will take effective action. If that confidence disappears, markets could collapse even at lower levels of debt.

Billionaire Ray Dalio, founder of Bridgewater Associates, warned at an event in Singapore this month that the U.S. is approaching a wall.

"There will be debt restructurings, pressure on other countries to buy U.S. bonds, maybe even cutting payments to countries deemed hostile," Ray Dalio said, quoted by Fortune. He added that the U.S. will soon reach a point where it will have to sell more debt than global investors can buy, and that then "shocking developments" will begin.

• Romanian economists: US Congress will avoid crisis, but relations with our country are cooling

Economic and financial experts from our country consulted by the BURSA Newspaper claim that Republicans and Democrats will reach an agreement in Congress regarding the suspension or increase of the maximum ceiling of the US public debt. At the same time, the consulted experts state that, unfortunately, Romanian-American relations are quite tense at this moment, when the need for investments in our country is acute.

Financial expert Adrian Vasilescu, advisor to the governor of the National Bank of Romania, told us: "Things are quite clear in the US, especially since we are talking about a state that does not have economic problems. The US ended last year with one of the best GDPs in the world, even though before 2024, more precisely in 2023, economic analysts in that country claimed that there would be problems regarding the ability to pay. The current situation is not new. The US has had problems almost every year regarding finding an agreement between the government and the opposition in Congress to solve the problem of covering the budget deficit, the public debt. In the end, they always reached a consensus. What we see now in the American press are simple political disputes. I believe that no opposition party in the US has allowed itself to throw the country into insolvency. Although at the moment there are several issues of dispute between the opposition and the government regarding certain economic and financial measures that the Trump Administration wants to impose, in the end, interest will prevail. of the state, which is a priority over the interests of the two major American parties".

University professor Dr. Mircea Coşea told us: "I do not think there will be problems in the American Congress regarding the suspension or increase of the US public debt ceiling. The current threat has been a constant in recent years, but it was resolved through dialogue between the two major US parties. However, there are a few things that worry me, through the analysis of the economic and fiscal measures that he wants to impose the Trump administration and which will lead to trade tensions, but also to the imbalance of the American economy. These things could lead to stagflation, especially in light of the tariff sanctions imposed on Mexico and Canada. The imbalance of the US economy will certainly affect us, especially now that we are witnessing the most frosty atmosphere in relations between the central authorities in Washington and Bucharest. The signals from the last week are very harsh, especially in light of the fact that the US Embassy in Bucharest has resumed the speech of Vice President JD Vance regarding democracy in our country, which seems to me to be a very serious thing. The threats sent by the American embassy regarding possible illegal Romanian migrants in the US and the postponement sine die of Romania's inclusion in the Visa Waiver program, even though we meet all the technical conditions, will have an impact on economic relations between the two states and on the postponement of American investments in our country or the realization of investments such as the one that the Bucharest government recently boasted about - the participation of an American company in the construction of a starch factory - which belong to the first phase of the industrial revolution. Therefore, I expect a blockage of economic relations between the US and Romania, to which will be added the consequences of the peace in Ukraine with its effects on commercial traffic in the Black Sea".

He stated that, unfortunately, the current political decision-makers of Romania are not aware and do not take seriously the signals coming from Washington, and our diplomats in the US capital are not doing what is right. In the opinion of Mr. Mircea Coşea, our economic attaches should contact American investors, especially those in the defense industry - in the context in which at European level the development of this industry is being discussed - and convince them to participate in investments in production units in our country as they participated in those made in Poland.