Washington — Treasury Secretary Janet Yellen told congressional leaders that the U.S. has reached a limit on the amount of debt it can issue to meet its obligations, prompting “emergency measures” that would allow the country to avoid a catastrophic default for at least the next few months. .
“[T]The length of time that the emergency measures could last is subject to considerable uncertainty, including the challenges of forecasting US government payments and receipts for months into the future,” Yellen wrote in letter to Speaker of the House of Representatives Kevin McCarthy. “I respectfully urge Congress to act immediately to protect the full faith and credit of the United States.”
The “emergency measures” delay contributions and repayment of investments for public pension and health funds, giving the government enough financial space to handle day-to-day spending until around June.
The expected move comes amid friction between President Biden and Republicans in the House of Representatives, who have raised concerns about whether the US can weather a possible economic crisis.
Yellen wrote that the federal government has reached its legal borrowing capacity of $31.381 trillion, an artificially imposed limit that lawmakers have increased about 80 times since the 1960s. Even many anxious analysts believe a deal will happen.
But this particular moment appears more complicated than past showdowns over the debt limit because of the wide-ranging differences between Mr. Biden and Mr. McCarthy, who leads the restive Republican Party.
The disagreements increase the risk that the government could default on its commitments for political reasons, a problem that could roil financial markets and – if left unchecked – plunge the world’s largest economy into an entirely avoidable recession.
The pair have months to seal a deal, but years of escalating cross-party animosity have led to a conflicting set of demands that threaten the ability of U.S. lawmakers to work together on basic responsibilities.
Mr. Biden is pushing for a net increase in the debt limit to meet existing financial obligations, refusing to even begin negotiations with Republicans. McCarthy is calling for negotiations that he believes will lead to spending cuts. It’s unclear how much he wants to cut or whether his fellow Republicans will support any deal after a rocky start to the new Congress, which has required 15 rounds of voting. elected Speaker McCarthy.
Asked on Wednesday whether there was evidence that House Republicans could ensure the government would prevent a default, White House press secretary Karin Jean-Pierre said it was their “constitutional duty” to protect the full faith and credit of the United States. She did not say whether the White House saw signs of default at this stage.
“We’re just not going to negotiate on that,” Jean-Pierre said. “They need to feel responsible.”
For his part, McCarthy said Mr. Biden must recognize the political realities that come with divided government. He likens the debt ceiling to a credit card limit and calls for a level of fiscal restraint not seen under President Donald Trump, the Republican who signed a bipartisan suspension of the debt ceiling in 2019.
“Why create a crisis through this?” McCarthy said this week. “I mean, we have a Republican House, a Democratic Senate. We have a president. I think it’s presumptuous to say, ‘Oh, we’re not going to negotiate on almost anything,’ especially when it comes to funding.”
Any deal must also pass the Democratic Senate. Many Democratic lawmakers are skeptical about working with Republicans associated with the Make America Great Again movement founded by Trump. The MAGA movement claimed that the 2020 election, which Trump lost, was rigged, a lie that fueled the uprising at the US Capitol on January 6, 2021.
“There shouldn’t be a political fight over the debt limit,” said Senate Majority Leader Chuck Schumer of New York. “It was reckless of Speaker McCarthy and the MAGA Republicans to attempt to use the full faith and credit of the United States as a political bargaining chip.”
What will happen if those measures are exhausted without a deal to raise the debt limit is unclear. A prolonged default could be devastating, with markets collapsing and panicked layoffs as confidence in the cornerstone of the global economy evaporates, the U.S. Treasury Department said.
In a report Friday, Bank of America analysts warned that “there is a high degree of uncertainty about the speed and extent of damage that the US economy may suffer.” The main problem is that the government will have to balance its books on a daily basis if it lacks the capacity to issue debt. If the government cannot issue debt, it will have to reduce the debt by 5% of the total US economy each year. But analysts say their basic argument is that the U.S. is avoiding default.
Still, if past debt-ceiling showdowns like the one in 2011 are anything to go by, Washington may be in a nervous state of suspended animation with little progress toward “Date X,” the deadline for emergency measures to run out. This creates its own set of problems.
“A deal is unlikely to be reached until the last minute, increasing the risk that the ceiling-raising deadline will be inadvertently missed,” said Andrew Hunter, senior U.S. economist at Capital Economics.