Bank Indonesia (BI) believes that the concerns expressed by US Treasury Secretary Janet Yellen regarding the potential default of the US debt will not materialize.
Erwin Haryono, the Executive Director of BI’s Communications Department, explained that news about the US government defaulting on its debt is not new. Usually, their political decisions will result in the decision to raise the debt ceiling.
Erwin pointed out that since 1960, the US government has raised the debt ceiling at least 78 times. “I think they will take the same steps this time,” he said.
For clarification, the debt ceiling is the limit on the amount of funds that the US government can borrow to meet its fiscal obligations and perform government spending, such as providing social security to the public, healthcare services, and security.
Like Indonesia, the US government earns revenue from taxes or customs receipts every year, but ultimately, government spending exceeds revenue. This has led to the US experiencing a deficit ranging from US$400 billion to US$3 trillion per year over the past several years.
The remaining deficit at the end of the year is reflected in the country’s total debt. In financing this debt, the US Treasury usually issues securities, such as US government bonds, which will ultimately be repaid with interest.
Once the US government reaches its debt limit, the Treasury cannot issue new debt securities, which ultimately stops the flow of funds to its budget.
Meanwhile, the US Congress is responsible for setting the debt ceiling, which currently stands at US$31.4 trillion. The debt ceiling has been raised since 1960 under the leadership of both the Democratic and Republican parties. Sometimes the limit is temporarily suspended and then re-established at a higher level.
Historically, the US has never defaulted, which is why Bank Indonesia believes this will not happen. “If this political decision (to raise the debt ceiling) is not taken, and they default, it will certainly affect the government’s credibility and subsequently have an impact on global financial stability. But once again, I don’t think this will happen,” Erwin said.
Earlier, US Treasury Secretary Janet Yellen had sent a letter to the US Congress, indicating that the US may default in June 2023 if Congress does not approve raising the debt ceiling.
“Failure to meet government obligations will cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability,” Yellen wrote in a letter to the US Congress earlier this year, as quoted by The Guardian.
If the US does indeed default, investors will lose confidence in the US dollar, causing the economy to weaken rapidly. Job layoffs will occur, and the federal government will not have the means to continue all its services.
Overall, the issue of the ceiling has significant global economic implications. If the US defaults on its debt, it could cause a ripple effect that could lead to financial instability across the world.
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