As the government works its way through another debt showdown, the good news is that most of the federal debt is owned by U.S. shareholders.
The bad news is that still leaves roughly $7 trillion in federal debt held by those abroad.
That includes $1.1 trillion held in Japan and $860 billion held in China, which are the largest foreign sources of financing the U.S. debt.
That could give those holders an outsized say if President Biden and Congress do not strike an agreement to raise the government’s borrowing limit. Economists expect holders of U.S. debt would then demand higher interest payments, adding to America’s already dire fiscal woes.
“The federal government would be forced to either hike taxes or cut spending immediately to be able to pay in the increased interest,” said Chris Edwards, an economic analyst at the Cato Institute. “With Social Security and Medicare off the table, there is only so much the government could cut. It just depends on how much revenue there is at any moment.”
The Treasury Department said this week that it could run out of maneuvering room to keep paying the bills in early June, leaving the government bumping up against its borrowing limit.
If the result is a failure to make interest payments, banks, investment funds and foreign governments could begin unloading U.S. debt.
Mr. Edwards told The Washington Times that could cause a global financial crisis.
“It would disrupt the international markets because we’re the largest economy in the world,” he said. “Confidence in the economy would be rocked, which would do damage all on its own apart from a debt default.”
The government’s total debt stands at $31.5 trillion.
Of that, $6.8 trillion is held by the government itself, most of it in the form of IOUs to the Social Security and Medicare trust funds.
That leaves $24.6 trillion in debt held by the public, including foreign governments, mutual funds, banks, private investors or insurance companies.
Most are held in the U.S., but about a third are held abroad.
Japan and China have traded places over the years as the largest holders, with Japan currently in the lead at more than $1 trillion.
China held $860 billion as of January, but experts say the actual amount held by Chinese nationals is likely higher because Hong Kong owns another $226 billion and Chinese investors often purchase U.S. debt through tax shelters in Luxembourg or the Cayman Islands.
The U.K. held $668 billion, Belgium held $331 billion and Luxembourg rounded out the top five at $318 billion.
Lawmakers on Capitol Hill are not eager to find out how they would respond to a default.
“We have less than a month to go until we hit June 1,” said Senate Majority Leader Charles E. Schumer, New York Democrat. “Every day wasted is another day closer to catastrophe.”
Moody’s Analytics estimated in March that in the first month of a default, the federal government would have to cut spending immediately by $125 billion. If the impasse lasted a second month, the government would have to cut an additional $200 billion in spending.
“A TARP moment seems likely, hearkening back to that dark day in autumn 2008 when Congress initially failed to pass the Troubled Asset Relief Program bailout of the banking system, and the stock market and other financial markets cratered,” Moody’s chief economist Mark Zandi told the Senate Banking Committee.
Yet it remains uncertain exactly if the U.S.’s creditors would go unpaid. Some Republican and Democratic lawmakers agree that the Constitution requires the federal government to honor its debt.
The requirement means that even if Congress refuses to raise the debt ceiling, incoming tax revenue will be used to pay the roughly $500 billion in annual interest owed to the nation’s creditors.
But the Treasury Department has long said it does not have the technical capabilities to pick and choose which debts are paid in case of a default. When the government went through a debt showdown in 2011, the Treasury pondered options such as selling assets, imposing across-the-board trims, or prioritizing programs.
Officials eventually concluded that delaying all payments was the “least harmful” option. Even if the situation has changed, prioritization of payments would likely face legal challenges from outside investors and financial institutions.
“Bond investors, unsure of how this legal uncertainty would be resolved would demand a much higher interest rate in compensation,” said Mr. Zandi. “Politically it seems unimaginable that [foreign] bond investors … would get their money ahead of American seniors, the military, or even the federal government’s electric bill for long.”
• Haris Alic can be reached at halic@washingtontimes.com.