The probability of a U.S. sovereign default—whether perceived as high or low—remains a topic of significant debate in financial and policy circles, especially during periods of political deadlock over the federal debt ceiling. This debate has recently intensified following the narrow passage of the “One Big Beautiful Bill” by the U.S. House of Representatives in May 2025. This $4 trillion tax and spending proposal aims to preserve many provisions of the 2017 Tax Cuts and Jobs Act (TCJA), set to expire at the end of 2025. The bill proposes to extend lower individual income tax rates, maintain the expanded $2,000 Child Tax Credit, keep the corporate tax rate at 21%, exempt tips and overtime pay from federal income taxes, and raise the State and Local Tax (SALT) deduction cap from $10,000 to $40,000. To counterbalance these tax reductions, the bill includes cuts to social spending; however, projected savings are insufficient to cover the fiscal outlay. According to the Joint Committee on Taxation, the bill could add approximately $3.8 trillion to the federal deficit over the next decade, triggering unrest in global bond markets and prompting a swift reaction from bond vigilantes concerned about long-term fiscal sustainability.
Sovereign default occurs when a government fails to meet its debt obligations, typically by missing interest or principal payments. Over the next four years, the U.S. is expected to refinance approximately $8.4 trillion in maturing debt, with projected new issuances amounting to $2.205 trillion in 2025, $2.078 trillion in 2026, $2.161 trillion in 2027, and over $2.0 trillion in 2028. While most sovereign defaults are caused by insufficient revenues, foreign reserves, or restricted market access, the United States operates under a different paradigm. As the issuer of the world’s reserve currency, the U.S. can theoretically meet its obligations by creating more dollars via the Federal Reserve. However, this power is constrained by inflationary risks. Increasing the money supply without a commensurate rise in economic output can destabilize prices, as illustrated by the classical quantity theory of money.
Despite these concerns, the U.S.’s monetary sovereignty significantly reduces the likelihood of a practical or involuntary default. Unlike emerging markets that borrow in foreign currencies and must maintain reserve balances, the U.S. cannot “run out” of dollars. As former Federal Reserve Chair Alan Greenspan famously stated, “The United States can pay any debt it has because we can always print the money to do that.” Thus, any default would be more likely technical—resulting from political or legal constraints rather than financial incapacity. Such technical defaults stem from delayed debt payments due to legislative gridlock, not an outright refusal or inability to pay, distinguishing them from substantive defaults.
The broader issue lies not in the size of the U.S. debt itself but in the contentious politics surrounding the federal debt ceiling. This statutory cap on how much the Treasury can borrow to meet existing obligations has frequently led to fiscal standoffs, threatening government shutdowns or missed payments. When the ceiling is reached without congressional consensus to raise or suspend it, the Treasury may be forced to delay payments, including those on federal debt. While such a delay would likely be temporary, it would technically constitute a default. Notable past instances include the 2011 standoff that resulted in Standard & Poor’s downgrading the U.S. credit rating from AAA to AA+, and a similar episode in 2023 that narrowly avoided default through last-minute legislation. The most recent credit rating downgrade by Moody’s in May 2025 and growing bond market activism signal renewed concerns over the politicization of fiscal governance.
Critics of raising the debt ceiling argue that doing so degrades the quality of U.S. Treasury securities and erodes their reputation as a global safe haven. These concerns have intensified in the face of recurring political brinkmanship, leading to debates over the credibility of U.S. debt instruments. Though the likelihood of a substantive default is minimal given the U.S.’s monetary capabilities, persistent political stalemates create uncertainty and increase the probability of technical default events.
A U.S. default, even if temporary, would carry far-reaching consequences. Treasury securities are foundational to the global financial system, widely regarded as risk-free assets. A breach in this trust would ripple through global markets, elevate borrowing costs, and potentially undermine the U.S. dollar’s reserve currency status. Investor confidence in U.S. fiscal governance and long-term debt sustainability would likely deteriorate, amplifying financial volatility both domestically and internationally.
In conclusion, while the United States is uniquely positioned to avoid default through its control over monetary policy, the risk of a technical default due to political impasse remains real. The ongoing debate about the sustainability of U.S. debt and the recurring battles over the debt ceiling underscore deeper structural challenges in fiscal policy. Until the U.S. enacts a credible strategy to rein in its rising debt burden, the specter of default—albeit technical rather than substantive—will continue to linger in financial discourse.
Written by Michael Ogunremi with assistance from artificial intelligence technologies
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