KEY POINTS:
- US President Joe Biden has postponed his planned trip to Australia.
- Experts warn the threat of the US defaulting on its debt has increased.
- The impacts of a default would be major.
Joe Biden won't be coming to Australia after all. Instead, the United States president is locked in crunch talks to avoid Washington defaulting on its debt.
Debt ceiling negotiations are simultaneously routine and the potential trigger for a worldwide recession, with disaster traditionally averted at the last minute.
Confirming on Wednesday, Mr Biden insists defaulting "is simply not an option".
US President Joe Biden says his country defaulting on its debt is not an option. Source: AAP / Sipa USA
So what happens if there's a default, how likely is it, and is Donald Trump a factor?
Here's what you need to know.
What is the debt ceiling?
First introduced in 1917, the debt ceiling sets a maximum amount of debt the US government can incur. It now stands at US$31.4 trillion ($47.2 trillion).
Each year, US politicians must agree to raise the limit, or the government defaults on its debts.
The ceiling has been raised more than 90 times since its introduction, often without much fanfare. But there's been a number of debt ceiling crises in the US over the years - including in 1995 and 1996, 2011, 2013, and 2021 - with political squabbling before the ceiling was raised.
Now the clock's ticking again; the Treasury warns the US government will not be able to repay its debts beyond 1 June without an agreement.
US Speaker Kevin McCarthy says the two sides are nowhere near an agreement. Source: Getty / Alex Wong
What happens if the US defaults?
The US has never defaulted on its debt, so we'd be in uncharted territory.
In a 2021 report, the White House Council of Economic Advisors was stark on the possible impacts of that changing: a global recession, frozen credit markets across the world, decimated stock markets, and mass unemployment globally.
And Bruce Wolpe, senior fellow at the US Studies Centre at the University of Sydney, was blunt about the prospect.
"It's like setting off a nuclear weapon against the economy. It will be a depressant on the world economy at the same time as it explodes the US economy," he said.
Former President Barack Obama was also pushed to the brink. Source: Getty / Alex Wong
AMP chief economist Shane Oliver says defaulting would force Washington to slash spending by 7 per cent of GDP, which would likely plunge the US into recession. That would have knock-on effects for Australians, he said.
"Global recession would mean less demand for our exports, lower commodity prices, and less export earnings generally," he said.
"I would also be a blow to confidence in Australia, so it could tip us into recession as well."
But running negotiations down to the wire also hurts, with share markets spooked by the uncertainty.
Could it really happen?
Debt ceiling negotiations are often a high-stakes game of chicken, and Mr Oliver puts the threat of a default at around 10-15 per cent.
To avert catastrophe, the deal needs to pass through the Republican-controlled Congress and the Democrat-controlled Senate. That means it has to be bipartisan, and Mr Oliver believes "sensible heads" in both parties will win out.
"We have seen this movie before; [there's] lots of panic, lots of noise, everyone's saying no deal. Then at the last minute, you get some sort of agreement," he said.
Why is the threat bigger this time?
But Mr Wolpe fears a new generation of hardline Republicans with significant political power risks pushing the US towards the cliff.
The Freedom Caucus, a small group that also, had threatened to shoot down the party's proposal unless their demands were met. And that's just working out the Republicans' position, with further negotiations with the White House needed.
Donald Trump appeared to back the prospect of a default last week. Source: AP / Rebecca Blackwell
Their increasingly stringent demands - like slashing funding for healthcare - would simply be "unacceptable" to Democrats, Mr Wolpe said.
“It's going to be very hard to bridge that gap ... [And] even if Democrats come to the table and give a bit, is that acceptable to the Republican hardliners? This is really still right at the brink,” he said.
Republicans raised the ceiling multiple times under former President Donald Trump.
“They didn't insist on what they're insisting on today with a Democratic president. That's what makes the politics so awful: it’s played in such a hyper-partisan way,” Mr Wolpe said.
While most Republicans fear the impacts of a default, the rebel wing has a more reckless outlook, he warned.
"That wing in the Republican Party is sort of like: oh well, let's just bring the house down, let’s upend Washington completely, let's go after the deep state," he said.
"Let's kick the town over so that they can make their point about how government is not serving the American people in the way they want it served."
Mr Wolpe warns a more hardline Republican Party increases the risk of default. Source: Getty / Alex Wong
"In the long-term, President Biden [will be blamed] because at the end of the day, the president runs the economy. He's facing a re-election [race] next year,” he said.
Is Donald Trump a factor?
Mr Trump, the frontrunner for the party's presidential nomination, has also escalated his rhetoric on the debt ceiling, appearing to endorse the prospect of a default last week.
"If they don’t give you massive cuts, you’re going to have to do a default,” he told his fellow Republicans.
"I think the Democrats will absolutely cave, will absolutely cave because you don’t want to have that happen. But it’s better than what we’re doing right now, because we’re spending money like drunken sailors.”
Some Republican senators have distanced themselves from the comments, but Mr Trump's strong support base means he continues to wield significant influence over other politicians.
