Yellen warns of US default risk in early June, urges debt ceiling hike

WASHINGTON, Jan 13 (Reuters) – U.S. Treasury Secretary Janet Yellen said on Friday the U.S. could reach the $31.4 trillion statutory debt ceiling on Jan. 19, prompting the Treasury to begin extraordinary monetary management measures. June.

“Once the threshold is reached, the Treasury must begin taking some extraordinary action to prevent the United States from defaulting on its obligations,” Yellen said in a letter to House Speaker Kevin McCarthy and other congressional leaders.

“To protect America’s entire faith and credit, lawmakers must act quickly to raise the debt ceiling,” he urged.

“While the Treasury is currently unable to provide an estimate of how long the extraordinary measures will enable the government to continue paying its obligations, it is unlikely that the cash and extraordinary measures will run out before the start of June,” the letter added.

Republicans, who now control the House, have threatened to use the debt ceiling as leverage to demand spending cuts from Democrats and the Biden administration. That has raised concerns in Washington and on Wall Street that this year’s fierce fight over the debt ceiling could become as disruptive as the protracted war of 2011, a brief downgrade of the U.S. credit rating and years of forced domestic and military spending cuts.

The Washington Post reported House Republicans prepared an emergency plan to breach the debt ceiling late Friday. The proposal, which was in the early stages of being drafted, would prioritize some payments to the Treasury Department if the U.S. hits the debt ceiling, the newspaper said.

The White House said on Friday after Yellen’s letter that it would not negotiate on raising the debt ceiling.

“It should be done without conditions,” White House spokeswoman Karine Jean-Pierre told reporters. “There will be no negotiation on that.”

A proposal by House Republicans, reported by the Washington Post, would call on the Biden administration to make only the most important federal payments if the Treasury Department comes up against a legal limit on how much it can legally borrow. The plan will call for the department to continue paying interest on the loan, the newspaper said, citing sources.

House Republicans’ payment priority plan could stipulate that the Treasury Department continue to pay for things like Social Security, Medicare and veterans’ benefits, as well as funding the military.

The Washington Post reported that the plan was part of a private deal reached this month to resolve a standoff between right-wing hardliners in the House and the conservative McCarthy over the House speaker election.

Yellen’s estimate, which expresses confidence that the government can pay its bills as early as June without raising the ceiling, marks a deadline earlier than some outside budget analysts’ forecasts — the government will reach its cash and borrowing capacity — known as the “X date” — in the third quarter of the 2023 calendar year.

Analysts noted that some Treasury bills maturing in the second half of the year had a premium on their yields.

“You can read this partly as trying to get Congress to act quickly,” said Shai Agabas, economic director at the Bipartisan Policy Center, adding that the Treasury is being conservative in its approach.

Yellen said there is long-standing “substantial uncertainty” that extraordinary measures could prevent default, due to a variety of factors, including challenges in forecasting future government payments and revenues.

Pension investments stopped

As of Wednesday, Treasury data showed the U.S. federal debt was $78 billion below the ceiling and Treasury operating cash balances stood at $346.4 billion. The department reported an $85 billion December deficit on Thursday, as revenues eased and spending increased, particularly for debt interest costs.

In her letter, Yellen said the Treasury expects this month to freeze new investments in two government retiree funds for pensions and health care, as well as freeze reinvestments in the Government Bond Investment Fund, or G Fund, part of a savings program for federal employees. Pension investments will be restored once the debt ceiling is raised.

“The use of extraordinary measures enables the government to fulfill its obligations only for a limited period of time,” Yellen wrote to McCarthy and other congressional leaders.

“It is therefore critical that Congress act in a timely manner to raise or suspend the debt ceiling. Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability,” Yellen wrote.

Reporting by Kanishka Singh and David Lauder; Additional reporting by Richard Cowan and Ismail Shakil; Written by David Lauder and Tim Ahman; Editing by Diane Croft, Andrea Ritchie and Grant McCool

Our Standards: Thomson Reuters Trust Principles.

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