US Reaches Its Legal Debt Limit. What Does This Mean for Mexico?

The US government reached its legal debt ceiling on Thursday, prompting the Treasury Department to deploy extraordinary measures and fiscal accounting tools to curb government investments so the bills continue to be paid. However, these measures could be exhausted by June, bringing along an economic meltdown. 

In a letter to Congress, Treasury Secretary Janet Yellen stated that the government would begin using extraordinary measures to prevent the nation from breaching its statutory debt limit and asked lawmakers to raise or suspend the cap so the government could continue meeting its financial obligations. However, she wrote to congressional leaders today that these emergency measure tools can be extended through June 5. “The period of time that extraordinary measures may last is subject to considerable uncertainty, including the challenges of forecasting the payments and receipts of the US Government months into the future. I respectfully urge Congress to act promptly to protect the full faith and credit of the US,” writes Yellen. 

Once the government exhausts its extraordinary measures and runs out of cash, it will be unable to issue new debt and pay its bills. Many warn that defaulting on the debt could send the US into immediate recession.

The extraordinary measures include redeeming existing investments and suspending new investments of the Civil Service Retirement and Disability Fund and the Postal Fund, according to the Treasury. Other measures include a pause to the reinvestment of the investment fund in government securities of the Federal Employees’ Retirement and Savings Plan. 

According to EFE, the White House asked Republicans to allow Congress to approve the debt ceiling limit “without conditions” and stressed that there is no room for negotiation. The US has never had to default on its national debt, but it came close in 2011. At the time, the debt debate cost the American economy US$1.3 billion and led to the country’s first-ever credit downgrade from AAA to AA+. Personal interest rates went up and household wealth suffered a US$2.4 trillion loss, given stock market declines, according to CVS News. 

The measures taken by the US government could have a spillover effect in Mexico or even influence policy in the Latin American country. During the past few years, for example, the Bank of Mexico (Banxico) has closely followed the US Federal Reserve (Fed)'s decisions regarding increasing interest rates to face the expected global recession. However, Banxico is beginning to look for a way to disengage from the Fed, as previously mentioned by MBN. One of the reasons behind the interest to disengage is the fear of a potential recession in the US.