Suspension of the U.S. debt limit: double global financial standard?

June 30, 2023

Amid threats of recession, U.S. debt has been growing. What has happened with the debt limit reflects disparities and raises questions about the future of the global economy.

U.S. currency, U.S. dollars, currency issue, banknotes, Más Colombia

Debt is an economic tool used by all countries. Properly used, it allows for investment and the generation of productive transformation and economic development. However, an excessively high level of indebtedness increases the risk of defaulting on obligations.

The U.S. debt cap has been raised to such an extent that the country owes more than it produces. Paradoxically, multilateral organizations, led in part by the United States, impose strong restrictions on other countries in this regard.

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During the first quarter of 2023, the U.S. debt was 118% of its Gross Domestic Product (GDP), according to the Federal Reserve’s Bureau of Economic Data (FRED), when 20 years ago this indicator was 58%.

In fact, between 1960 and 2021, Congress raised the U.S. debt limit 78 times. On this occasion, the legislature decided to suspend the limit, so that the Treasury can temporarily exceed it.

It is paradoxical that the world power has recurrently raised its debt cap while, through the International Monetary Fund (IMF) and the World Bank, it imposes severe restrictions on other countries in this regard.

U.S. debt during the first quarter of 2023 was $31.4 trillion

The public debt of the United States is equivalent to the sum of the debts of the following four largest debtors: China (USD $14 trillion), Japan (USD $10.2 trillion), France (USD $3.1 trillion), and Italy (USD $2.9 trillion) (figures in trillions of dollars in English), according to calculations by Aljazeera with information from the Institute of International Finance (IIF).

To get a better picture, the Banco de la Republica stated that, in February 2023, Colombia’s foreign debt was USD $187,772 million, 54.5% of the GDP. Although this is an astronomical figure that has been growing with respect to GDP, it is much lower than that of countries such as Spain (113.20%) and the United Kingdom (102.64%).

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One of the fundamental reasons why the United States can increase its debt without facing serious consequences is the role of the dollar as the world’s reserve currency. This status gives the North American country the advantage of financing itself by issuing Treasury bonds in its own currency, which increases the demand for dollars and reduces borrowing costs.

In addition, its status as an economic and political power influences investors’ confidence in the country’s ability to pay.

The IMF and the World Bank: restrictions on other countries

The IMF and the World Bank impose restrictions and conditions on countries requesting loans or financial assistance. These requirements, known as “conditionality,” typically include austerity measures, structural reforms, and specific economic policies.

The IMF’s debt limit policy (DLP) establishes a framework for the use of quantitative conditionality in countries with IMF-financed programs. These conditionalities seek to stabilize the debt-to-GDP ratio over time, a trend that is not observed in U.S. debt.

The paradox arises when comparing the U.S. approach to debt with the restrictions imposed by the IMF and the World Bank on other countries. While the United States has the ability to raise its debt limit without major consequences, developing countries that are highly indebted often face difficulties in accessing new international loans on favorable terms.

The disparity between the way in which U.S. debt is handled and the restrictions imposed on other countries by international agencies raises concerns about the fairness and consistency of global financial policies.

In this regard, experts such as former Minister Ocampo have insisted that it is essential to promote greater transparency and accountability in international financial institutions to ensure fair and equitable treatment for all countries.

Likewise, organizations and academics have explained the importance of recognizing the particularities of each nation and adapting financial policies to their specific needs, reviewing the suitability of imposing austerity measures that could undermine public spending and the welfare of the most vulnerable populations.