US Treasury secretary Janet Yellen has warned the US will hit its $31.4tn borrowing limit next week and could run the risk of a damaging debt default starting in early June, setting the stage for a high-stakes fiscal negotiation between the White House and Congress in the coming months.
In a letter to congressional leaders on Friday, Yellen said the US would reach the debt ceiling set by Congress on January 19, and the Treasury would begin to take “extraordinary measures”, or “special management steps”, in order to honour its payments.
The Treasury secretary said there was “considerable uncertainty” surrounding the amount of time that reprieve would last, but it was “unlikely” to run out before “early June”, leaving the White House and Congress little more than four months to reach an agreement to increase the debt limit or face default.
“It is . . . critical that Congress act in a timely manner to increase or suspend the debt limit. Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability,” Yellen warned.
“Indeed, in the past, even threats that the US government might fail to meet its obligations have caused real harms, including the only credit rating downgrade in the history of our nation in 2011,” she added.
The debt ceiling stand-off this year is expected to be the most difficult to resolve since 2011, when president Barack Obama and Senate Democrats squared off against the new Republican majority in the House which, under the influence of the Tea Party, was demanding deep spending cuts in exchange for a debt ceiling increase.
In the end a deal was reached that was partly brokered by Joe Biden, then the vice-president, but not before some heavy market turmoil and a downgrade of US debt by Standard & Poor’s.
This year, House Republicans are again demanding big budget cuts in exchange for raising the debt limit, but they have a slimmer majority in the lower chamber, which has given even more influence to fiscal hardliners. In addition, Kevin McCarthy, the Republican House Speaker, has agreed to procedural rules that would allow just one lawmaker to make an attempt to strip him of his power, which could make it harder for him to compromise.
Chip Roy, the Republican congressman from Texas who voted repeatedly against McCarthy for Speaker last week before ultimately supporting him, has already threatened to call a no-confidence vote in the California congressman if he tries to lift the debt ceiling without an acceptable agreement.
“Our point is: let’s fight now to end the status quo,” Roy told CNN.
The Biden administration and Democrats have made it clear they do not intend to agree to any budget cuts as part of a negotiation on the debt ceiling, which they believe should be raised on its own since it merely allows the US to honour previous borrowing commitments often passed by both parties.
The Biden administration has also said it does not intend to take executive action — such as minting a trillion-dollar platinum coin, a concept that has been floated in the past — to avoid a default without congressional intervention.
“We’re not considering any measures that would go around Congress. That’s not what we’re doing,” Karine Jean-Pierre, the White House press secretary, said this week. “This is a fundamental congressional responsibility, and Congress must act.”
