United States debt ceiling crisis

To get into the topic and analyze it deeply lets know about the terms involved in it first. What is debt ceiling and U.S history regarding it? Every year during Budget session United states of America discloses the financials about its plans on Govt spending, expenditures, Tax collections and outlays. The revenue for doing all these activities comes mainly in the form of Taxes from public. If the Treasury does not collect enough in revenue to pay for expenditures by the federal government, it may be authorized by Congress to issue debt (in other words, borrow money) to pay for the federal budget deficit. A limit upto what extent the debt can be taken is decided on the basis of debt paying ability. Raising the debt ceiling directly neither increases nor decreases the budget deficit. U.S has had public debt since its inception. The debt ceiling has been raised 74 times since March 1962, including 18 times under Ronald Reagan, eight times under Bill Clinton, seven times under George W. Bush and three times (to August 2011) under Barack Obama. As of May 2011, approximately 40 percent of US government spending relied on borrowed money. Raising the debt ceiling would allow the federal government to continue to borrow money to support current spending levels. If the debt ceiling is not raised, the federal government would have to cut spending immediately by 40 percent, affecting many daily operations of the government. If the interest payments on the national debt are not made, the United States would be in default, potentially causing catastrophic economic consequences for the U.S. and the wider world as well. So if U.S doesn’t raises its debt it will fail to meet its legal obligations which include – Paying Social Security Medicare benefits Military salaries Interest on the debt and many other items.

Annual gross domestic product (GDP) to the end of June 2011 was: $15. Democrat leader Obama had raised his concerns about raising the debt ceiling to avoid pushing American economy again into recession but Republicans opposed strongly as any Debt ceiling increment should proceed with a strong cut in internal spending.4 trillion in savings over the next decade. There was a tussle occurred in accepting the hike in debt ceiling between Democrats and Republicans.003 trillion. .Take a look at how US debt reached its GDP level. although the Congressional Budget Office pegs the savings at $2. The two-stage plan calls for $2. the House of representatives agreed to raise borrowing limit by $3 trillion with a cut of $ 2.3 Trillion.Thus gross debt at a ratio of 96% of GDP. It also authorizes an increase in the nation’s borrowing limit through the end of 2012. As of August 3.4 Trillion in internal spending. and debt held by the public at 65% of GDP. Finally on Aug 2 nd.1 trillion. A special congressional committee to recommend long-term fiscal reforms is also part of the package. 2011 – US debt was : $ 14.

346 trillion. Indian contributes $ 41 million in terms of securities and stands 16th in the list.As of May 2011. followed by Japan with $ 0.15 trillion.91 trillion and then by UK with $ 0. . China Mainland is the major creditor for US treasury securities holding securities of value $ 1.514 trillion. Total amount from Treasury securities as of May 2011 : $ 4.

Australian S&P/ASX 200 and India's S&P CNX Nifty).D & NR. It is a division of the McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. which also includes Moody's Investor What does its credit ratings mean ? AAA: best-quality borrowers. In common language that means now lending money to US is not safe (AAA rating means safe) and little risky. Both imports and exports will be impacted. The main gainer has been gold. . the US had to flush the economy with cash to keep the ship afloat. will have an adverse impact. B. it becomes necessary to borrow afresh to repay old loans. India’s exports to the US. That also means the interest rates will increase slightly making it difficult for the US to It is the universal truth that if you borrow money. Effect on India: As the domestic economy is not insulated from the world economy. BB. The company is one of the ‘Big Three’ credit-rating agencies. you must pay it back on time. It is well known for its stock-market indices(US-based S&P 500. CC(highly vulnerable . the demand for gold has increased. R. After its banking system collapsed in 2008. Oftentimes. The US government did this by borrowing several trillion dollars. there will definitely be some tremors here in India. As an outcome of all these developments. But even that did not prove enough.Who is Standard & Poor ? Standard & Poor's (S&P) is a United States–based financial services company. reliable and stable (many of them sovereign governments) AA + :high quality. SD. USA lost its AAA credit rating to AA+. also Indian exports had declined sharply in the second half of 2008-09 due to a slowdown in the US economy. with very low credit risk.speculative bonds).C. particularly IT services. Service and Fitch Ratings.  A: quality borrowers whose financial stability could be affected by certain economic situations In the same manner the rating continues BBB. As gold is seen as a safe haven. its price has hit a record high. Any slowdown in the US will have an impact on India in terms of its ability to export. but susceptibility to long-term risks appears somewhat greater As the risk level increases it gives AA. CCC. AA.after that A category will start. CI(past due on interest).

but for the next three years.At the same time. it is stuck with this paralyzed government as it is confronted with the monumental scams. which in turn will help bring down the current account deficit. With a reasonably strong financial system in place. . This will lead to the appreciation of the rupee. India is likely to bear the shocks. India needs more reforms now. there may be higher inflows of foreign institutional investor (FII) funds. as in the 2008 turmoil.