What Would Happen if the U.S. Defaulted on Its Debt (2023)


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Investors, executives and economists are preparing contingency plans as they consider the turmoil that would result from a default in the $24 trillion U.S. Treasury market.

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What Would Happen if the U.S. Defaulted on Its Debt (1)

By Joe Rennison

(Video) What happens if the U.S. defaults on its debt?

The U.S. debt limit has been reached and the Treasury Department is finding ways to save cash. After it runs out of maneuvers, what once seemed unfathomable could become reality: The United States defaults.

What happens next?

The far-reaching effects are hard to fully predict: from shock waves in financial markets to bankruptcies, recession and potentially irreversible damage to the nation’s long-held role at the center of the global economy.

The probability of a default remains low, at least based on opposing lawmakers’ assurances that a deal will be done to raise or suspend the debt limit and the long odds implied by trading in certain financial markets. But as the day approaches when the United States begins to run out of cash to pay its bills — which could be as soon as June 1 — investors, executives and economists around the world are gaming out what might happen immediately before, during and after, hatching contingency plans and puzzling over largely untested rules and procedures.

“We are sailing into uncharted waters,” said Andy Sparks, head of portfolio management research at MSCI, which creates indexes that track a wide range of financial assets, including in the Treasury market.

On the cusp of default, a ‘horror scenario’ comes into view.

Some corners of the financial markets have already begun to shudder, but those ripples pale in comparison to the tidal wave that builds as a default approaches. The $24 trillion U.S. Treasury market is the primary source of financing for the government as well as the largest debt market in the world.

The Treasury market is the backbone of the financial system, integral to everything from mortgage rates to the dollar, the most widely used currency in the world. At times, Treasury debt is even treated as the equivalent of cash because of the surety of the government’s creditworthiness.

Shattering confidence in such a deeply embedded market would have effects that are hard to quantify. Most agree, however, that a default would be “catastrophic,” said Calvin Norris, a portfolio manager and interest rate strategist at Aegon Asset Management. “That would be a horror scenario.”


A missed payment sets off a trading frenzy as markets begin to unravel.

The government pays its debts via banks that are members of a federal payments system called Fedwire. These payments then flow through the market’s plumbing, eventually ending up in the accounts of debt holders, including individual savers, pension funds, insurance companies and central banks.

(Video) What could happen if the U.S. defaults on its debt?

If the Treasury Department wants to change the date it repays investors, it would need to notify Fedwire the day before a payment is due, so investors would know the government was about to default the night before it happened.

There is more than $1 trillion of Treasury debt maturing between May 31 and the end of June that could be refinanced to avoid default, according to analysts at TD Securities. There are also $13.6 billion in interest payments due, spread out over 11 dates; that means 11 different opportunities for the government to miss a payment over the course of next month.

Fedwire, the payment system, closes at 4:30 p.m. If a payment due is not made by this time, at the very latest, the markets would begin to unravel.

Stocks, corporate debt and the value of the dollar would probably plummet. Volatility could be extreme, not just in the United States but across the world. In 2011, around when lawmakers struck a last-minute deal to avoid breaching the debt limit, the S&P 500 fell 17 percent in just over two weeks. The reaction after a default could be more severe.

Perhaps counterintuitively, some Treasury bonds would be in high demand. Investors would likely dump any debt with a payment coming due soon — for example, some money market funds have already shifted their holdings away from Treasuries that mature in June — and buy other Treasury securities with payments due further in the future, still seeing them as a haven in a period of stress.


A cascade of ratings downgrades creates ‘craziness’ for bondholders.

Joydeep Mukherji, the primary credit rating analyst for the United States at S&P Global Ratings, said that a missed payment would result in the government being considered in “selective default,” by which it has chosen to renege on some payments but is expected to keep paying other debts. Fitch Ratings has also said it would slash the government’s rating in a similar way. Such ratings are usually assigned to imperiled companies and government borrowers.

Moody’s, the other major rating agency, has said that if the Treasury misses one interest payment, its credit rating would be lowered by a notch, to just below its current top rating. A second missed interest payment would result in another downgrade.

A slew of government-linked issuers would also likely suffer downgrades, Moody’s noted, from the agencies that underpin the mortgage market to hospitals, government contractors, railroads, power utilities and defense companies reliant on government funds. It would also include foreign governments with guarantees on their own debt from the United States, such as Israel.

Some fund managers are particularly sensitive to ratings downgrades, and may be forced to sell their Treasury holdings to meet rules on the minimum ratings of the debt they are allowed to hold, depressing their prices.

“I would fear, besides the first-order craziness, there’s second-order craziness too: Like, if you get two of the three of the major rating agencies downgrade something, then you have a bunch of financial institutions that can’t hold those securities,” Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said at an event in Florida on Tuesday night.


(Video) The Debt Ceiling Explained: Why You Should Care

The financial system’s plumbing freezes up, making trading more costly and difficult.

Importantly, a default on one government bill, note or bond does not trigger a default across all of the government’s debt, known as “cross default,” according to the Securities Industry and Financial Markets Association, an industry group. This means that a majority of the government’s debt would remain current.

That should limit the effect on markets that rely on Treasury debt for collateral, such as trillions of dollars worth of derivatives contracts and short-term loans called repurchase agreements.

Still, any collateral affected by a default would need to be replaced. CME Group, a large derivatives clearing house, has said that while it has no plans to do so, it could prohibit short-dated Treasuries from being used as collateral, or apply discounts to the value of some assets used to secure transactions.

There is a risk that the financial system’s pipes simply freeze over, as investors rush to reposition their portfolios while big banks that facilitate trading step back from the market, making buying and selling just about any asset more difficult.

Amid this tumult in the days after a default, a few investors could be in for a major windfall. After a three-day grace period, some $12 billion of credit default swaps, a type of protection against a bond default, may be triggered. The decision on payouts is made by an industry committee that includes big banks and fund managers.


The nation’s global financial reputation is permanently diminished.

As panic subsides, confidence in the nation’s fundamental role in the global economy may be permanently altered.

Foreign investors and governments hold $7.6 trillion, or 31 percent, of all Treasury debt, making them vital to the favorable financing conditions that the U.S. government has long enjoyed.

But after a default, the perceived risk of holding Treasury debt could rise, making it more costly for the government to borrow for the foreseeable future. The dollar’s central role in world trade may also be undermined.

(Video) What Happens If The US Hits The Debt Ceiling And Defaults | Insider News

Higher government borrowing costs would also make it more expensive for companies to issue bonds and take out loans, as well as raise interest rates for consumers taking out mortgages or using credit cards.

Economically, according to forecasts by the White House even a brief default would result in half a million lost jobs and a somewhat shallow recession. A protracted default would push those numbers to a devastating eight million lost jobs and a severe recession, with the economy shrinking by more than 6 percent.

These potential costs — unknowable in total but widely thought to be enormous — are what many believe will motivate lawmakers to reach a deal on the debt limit. “Every leader in the room understands the consequences if we fail to pay our bills,” President Biden said in a speech on Wednesday, as negotiations between Democrats and Republicans intensified. “The nation has never defaulted on its debt, and it never will,” he added.

Joe Rennison covers financial markets and trading, a beat that ranges from chronicling the vagaries of the stock market to explaining the often-inscrutable trading decisions of Wall Street insiders. @JARennison

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(Video) U.S. debt default would spark job losses across the country


What Would Happen if the U.S. Defaulted on Its Debt? ›

So if the U.S. cannot pay its creditors, interest rates on U.S. debt would go up, creating a cascade of higher interest rates. So mortgage rates, credit card rates, car loan rates. All would become more expensive. Finally, there is a real concern about the economy — that a default could spark a recession.

Will the stock market crash if the US defaults on its debt? ›

A debt default could plunge the stock market as much as 45%. The U.S. could breach the debt ceiling as soon as next week, plunging the stock market by nearly half if a protracted default ensues, according to a White House projection.

What happens to veteran benefits if the US defaults on its debt? ›

In the event of a default the US government would face a severe fiscal crisis, leading to a significant reduction in available funds for all government programs, including veterans' benefits. This would result in delays to benefit payments until alternate funding has been sourced.

What would it mean if the US defaulted on its loans? ›

If the United States defaults on its debt, it would undermine faith in the federal government's ability to pay all its bills on time, affecting the government's credit rating and unleashing massive turbulence in financial markets. The United States was in a similar situation in 2011 when it got close to defaulting.

Who does the US owe debt to? ›

Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.

What would happen if the stock market completely collapsed? ›

Stock market crashes wipe out equity-investment values and are most harmful to those who rely on investment returns for retirement. Although the collapse of equity prices can occur over a day or a year, crashes are often followed by a recession or depression.

Can you owe money if stock fails? ›

The price of a stock can fall to zero, but you would never lose more than you invested. Although losing your entire investment is painful, your obligation ends there. You will not owe money if a stock declines in value.

Will the army take you if you have debt? ›

What credit score is needed to join the military? In general, the military isn't looking for a specific credit score when determining financial eligibility, but excessive debt or delinquent payments could be a red flag for further discussions with your recruiter.

Will the military take you if you have debt? ›

Military members who repeatedly fail to make payments or honor their debts can receive various punishments, including being discharged. The maximum punishment is a Bad-conduct discharge, forfeiture of all pay and allowances, and confinement for 6 months.

Can the military get you out of debt? ›

The VA doesn't offer military debt management programs, but service personnel are free to investigate them in their quest to get out of debt.

Has a US state ever defaulted? ›

State defaults in the United States are instances of states within the United States defaulting on their debt. The last instance of such a default took place during the Great Depression, in 1933, when the state of Arkansas defaulted on its highway bonds, which had long-lasting consequences for the state.

Has US debt ever been downgraded? ›

In 2011, S&P gave its first-ever credit downgrade to the U.S., cutting its rating to AA+. Over a decade later, that agency has still not restored its rating. A U.S. default could send shockwaves throughout the global economy and potentially cause a recession, according to experts.

Will student loans be forgiven if they are in default? ›

Defaulted loans are not eligible for any of our student loan forgiveness programs. But if you take advantage of Fresh Start, you'll get out of default status. Then you'll regain the ability to apply for forgiveness programs, including Public Service Loan Forgiveness.

Who is the biggest holder of U.S. debt? ›

Which countries hold the most US debt? Over the past 20 years, Japan and China have owned more US Treasuries than any other foreign nation. Between 2000 and 2022, Japan grew from owning $534 billion to just over $1 trillion, while China's ownership grew from $101 billion to $855 billion.

Which country has highest debt? ›

Here are the 25 countries with the highest debt-to-GDP ratios:
  • Sri Lanka. ...
  • Portugal. Debt to GDP Ratio: 114% ...
  • Cuba. Debt to GDP Ratio: 117% ...
  • Bahrain. Debt to GDP Ratio: 120% ...
  • Zambia. Debt to GDP Ratio: 123% ...
  • Suriname. Debt to GDP Ratio: 124% ...
  • Bhutan. Debt to GDP Ratio: 125% ...
  • United States. Debt to GDP Ratio: 129%
May 18, 2023

Does China have more debt than the US? ›

The United States, holding the highest national debt globally, has a total of $31.68 trillion, representing a YoY increase of $1.3 trillion or 4.28%, reaching $30.38 trillion. Therefore, China's national debt has surged almost three times that of the United States in the past 12 months.

Can you lose all your money in a 401k if the market crashes? ›

Unfortunately, a stock market crash is likely to result in major declines in your 401(k) account balance, at least short term. How can I avoid losing money from my 401(k)? The best way to avoid losing money in your 401(k) — especially during a recession — is to avoid selling off all your investments.

Could the entire stock market go to zero? ›

And while theoretically possible, the entire US stock market going to zero would be incredibly unlikely. It would, in fact, take a catastrophic event involving the total dissolution of the US government and economic system for this to occur.

Who profited from the 1929 crash? ›

While most investors watched their fortunes evaporate during the 1929 stock market crash, Kennedy emerged from it wealthier than ever. Believing Wall Street to be overvalued, he sold most of his stock holdings before the crash and made even more money by selling short, betting on stock prices to fall.

Should you cash stocks to pay off debt? ›

Bottom line. Very rarely should you sell your investments to pay off debt. The one exception here is if you have high-interest debt (like an outstanding credit card balance), but even then there are alternatives to consider before using your investments as repayment.

What happens when stock price falls below $1? ›

If a stock's share price drops below $1.00 and remains below that level for 30 days, the exchange may notify the company that it is not in compliance with listing requirements and is at risk of being delisted.

Can you owe money in Cryptocurrency? ›

If your crypto balance goes negative, you must pay back the amount owed.

What happens to my mortgage if I join the military? ›

Protection from foreclosure

If you took out a mortgage loan before entering the military, the SCRA requires your lender to get a court order to foreclose on the home while you are serving in the military and for one year after you complete your service. See more details about this protection.

How much debt can you have to join the Air Force? ›

Credit Checks and Military Branches

Excessive debt obligations that exceed half of the annual salary of the pay grade of the recruit can prevent enlistment. If debt includes mortgage debt, the total debt must not be more than two-and-a-half times the annual salary of the recruit.

Why do veterans struggle financially? ›

Veterans may be at greater risk for money mismanagement due to lack of financial experience, targeted predatory loans, and service-related traumatic brain injury. The highest levels of financial stress were found in post 9/11 service members and those closest to retirement.

How many military members are in debt? ›

A recent survey found that 27% of service members had more than $10,000 in credit card debt, which can be difficult to deal with, the report said. That's compared with just 16% of civilians.

How much debt is too much for a security clearance? ›

Is There a Debt Limit to Obtain a Security Clearance? No branch of the military has a set amount of debt that is the breaking point for security clearance. You could owe $5,000 or $50,000 and be granted or denied clearance. It's all a matter of how you deal with the debt.

Does military pay my bills? ›

Financial Bills: Servicemembers are responsible for their household expenses/bills while they are deployed. These expenses could include rent, mortgage payments, car payments, credit cards, etc. Before deploying you should ensure that you have made arrangements for these payments to be taken care of.

Does the military pay off your house? ›

The military does not pay closing costs or give you money to buy a new home. Which is why many families choose to wait until closer to retirement or ETS until buying a home. And why they spend a lot of time saving up for their “forever home.”

What happens if you don't pay military debt? ›

Having a debt in the military can come with a variety of consequences. Involuntary repayment options are available to the DoD, including wage garnishments that allow them to collect what's owed. Additionally, certain funds received from the federal government are potentially subject to seizure until the debt is repaid.

Which country has defaulted the most? ›

10 Countries That Are Most Likely to Default
  • 10 Countries That Are Most Likely to Default. Mar 17, 2023. ...
  • Argentina. The country is facing economic turmoil with a weakened currency, critically low reserves, and bonds trading at a low price. ...
  • Ukraine. ...
  • Tunisia. ...
  • Ghana. ...
  • Egypt. ...
  • Kenya. ...
  • Ethiopia.
Mar 17, 2023

What US states are not in debt? ›

States With the Least Debt in 2020

Mountain states, such as Idaho, Montana, Utah and Wyoming made the top-10 list, as did upper Midwest states like Nebraska, North Dakota and South Dakota. Alaska takes the No. 1 spot, with a tiny debt ratio of only 14.2%.

When has the US had no debt? ›

Payment of US national debt

On January 8, 1835, president Andrew Jackson paid off the entire national debt, the only time in U.S. history that has been accomplished.

Why is the US so deep in debt? ›

America's debt has risen massively since the beginning of the 21st century, as "politicians from both parties have made a habit of borrowing money to finance wars, tax cuts, expanded federal spending, care for baby boomers, and emergency measures to help the nation endure two debilitating recessions," writes Jim ...

What is America's credit rating? ›

Moody's currently has an "Aaa" rating for the U.S. government with a stable outlook - its highest creditworthiness evaluation.

At what age do student loans get written off? ›

At what age do student loans get written off? There is no specific age when students get their loans written off in the United States, but federal undergraduate loans are forgiven after 20 years, and federal graduate school loans are forgiven after 25 years.

Can the government take your house if you default on student loans? ›

The federal government won't take your home because you owe student loan debt. However, if you default and the U.S. Department of Education cannot garnish your wages, offset your tax refund, or take your Social Security Benefits, it may sue you.

Will Biden forgive student loans? ›

Biden's one-time student debt forgiveness program is estimated to cost $400 billion over time. Individual borrowers who made less than $125,000 in either 2020 or 2021 and married couples or heads of households who made less than $250,000 a year could see up to $10,000 of their federal student loan debt forgiven.

Do any countries owe the US money? ›

How about Ireland, the Cayman Islands, and Brazil? Did you expect them to be substantial holders of U.S. debt? Then there are the countries that owe America money. Even though Japan holds the biggest amount of U.S. debt, the U.S. is also owed a lot of money by them too.

How much does the US owe China? ›

Top Foreign Holders of U.S. Debt
RankCountryU.S. Treasury Holdings
1🇯🇵 Japan$1,076B
2🇨🇳 China$867B
3🇬🇧 United Kingdom$655B
4🇧🇪 Belgium$354B
6 more rows
Mar 24, 2023

Why does the US owe China? ›

U.S. debt to China comes in the form of U.S. Treasuries, largely due to their safety and stability. Although there are worries about China selling off U.S. debt, which would hamper economic growth, doing so in large amounts poses risks for China as well, making it unlikely to happen.

Do any countries have no debt? ›

The best example can be taken from Hong Kong (it is a one of the debt free countries), whose economy has the least debt to GDP ratio. It is an almost debt free country. It has a well-regulated financial system and large foreign reserves.

What country has more debt than the US? ›

Japan tops the ranking with central government debt of 221 percent of GDP, followed by Greece, Sudan, Eritrea, and Singapore. Not long ago, the U.S. was among the least indebted countries.

Why Japan has so much debt? ›

A flurry of big spending packages and ballooning social welfare costs for a rapidly ageing population have left Japan with a debt pile 263% the size of its economy - double the ratio for the United States and the highest among major economies.

Who is buying U.S. debt? ›

Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.

Why does the US have the highest debt? ›

The U.S. debt is the total federal financial obligation owed to the public and intragovernmental departments. The U.S. national debt is so big because Congress continues both deficit spending and tax cuts.

How much is Russia's debt? ›

According to the Bank of Russia's estimate, external debt of the Russian Federation as of March 31, 2023 totaled $357.9 billion, having decreased by $100.4 billion, or by 22.6%, since the beginning of the year.

Does debt affect market value? ›

Debt is often cheaper than equity, and interest payments are tax-deductible. So, as the level of debt increases, returns to equity owners also increase — enhancing the company's value. If risk weren't a factor, then the more debt a business has, the greater its value would be.

Who keeps the money when a stock goes down? ›

When a stock tumbles and an investor loses money, the money doesn't get redistributed to someone else. Essentially, it has disappeared into thin air, reflecting dwindling investor interest and a decline in investor perception of the stock.

Should I use stocks to pay off debt? ›

Very rarely should you sell your investments to pay off debt. The one exception here is if you have high-interest debt (like an outstanding credit card balance), but even then there are alternatives to consider before using your investments as repayment.

What company has the most debt? ›

  • Toyota Motor Corporation. It takes money to make money. ...
  • Evergrande Group. ...
  • Volkswagen AG. ...
  • Verizon Communications. ...
  • Deutsche Bank. ...
  • Ford Motor Company. ...
  • Softbank. ...
  • AT&T.
Feb 22, 2023

How much debt is too much? ›

One guideline to determine whether you have too much debt is the 28/36 rule. The 28/36 rule states that no more than 28% of a household's gross income should be spent on housing and no more than 36% on housing plus debt service, such as credit card payments.

How much debt is healthy? ›

Debt-to-income ratio targets

Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high.

Can I lose my 401k if the market crashes? ›

Unfortunately, a stock market crash is likely to result in major declines in your 401(k) account balance, at least short term. How can I avoid losing money from my 401(k)? The best way to avoid losing money in your 401(k) — especially during a recession — is to avoid selling off all your investments.

Can the stock market go to zero? ›

The answer is yes, although under extraordinary circumstances. Globally, only a few markets have suffered total market loss. The largest and most well known markets that went to zero are Russia in 1917 and China in 1949.

Will the stock market recover in 2023? ›

"In the first half of 2023, the S&P 500 is expected to re-test the lows of 2022, but a pivot from the Federal Reserve could drive an asset recovery later in the year, pushing the S&P 500 to 4,200 by year-end," the investment bank said in a research note.

Should I pay down debt during inflation? ›

Prioritize paying down high-interest debt

As inflation rises, central banks have been raising interest rates to make consumers spend less. These increased rates make it more expensive to borrow money, and make existing debt even more costly. For most consumers, the biggest impact of these rate hikes is on credit cards.

Is it better to have cash on hand or pay off debt? ›

Our recommendation is to prioritize paying down significant debt while making small contributions to your savings. Once you've paid off your debt, you can then more aggressively build your savings by contributing the full amount you were previously paying each month toward debt.

Is it smarter to invest or pay off debt? ›

Investing and paying down debt are both good uses for any spare cash you might have. Investing makes sense if you can earn more on your investments than your debts are costing you in terms of interest. Paying off high-interest debt is likely to provide a better return on your money than almost any investment.


1. What Would Happen If the U.S. Defaults for the First Time in History?
(Bloomberg Quicktake)
2. What happens if debt ceiling is breached
(Washington Post Shorts)
3. U.S. reaches debt ceiling but AVOIDS default for now
(Washington Post Shorts)
4. What are the global implications of a U.S. debt default?
(CBS News)
5. If the US Defaults on its DEBT, these 5 SCARY things will happen | Impact on India?
(Akshat Shrivastava)
6. What Happens If the US Defaults on Its Debt?
(Bloomberg Quicktake)


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