The US could fall into a debt default on June 1, warns the Treasury Department

The US Treasury Secretary, Janet Yellen, issued strong warnings to that country’s congressmen about the possibility of defaulting on the national debt on June 1 and urged approval of a suspension of the debt ceiling. President Joe Biden called a meeting for May 9 in search of agreements.

Janet Yellen, the US Treasury Secretary, notified Congress that the United States could default on its debt as of June 1, if the heated and repetitive political discussion over the debt ceiling drags on.

The Treasury manager’s warning was made in a letter sent to the leaders of the House of Representatives and the Senate. Yellen called for “protecting the full faith and credit of the United States by acting as soon as possible” to address the $31.4 trillion limit on her statutory borrowing authority. A discussion that lasts for weeks and that regularly ends up being resolved with bipartisan agreements.

“We have learned from previous impasses on the debt limit that waiting until the last minute to suspend or increase the debt limit can cause serious damage to business and consumer confidence, raise short-term borrowing costs for taxpayers and negatively impact the credit rating of the United States,” he said in the letter.

According to her, the Executive will stop being able to meet its obligations “at the beginning of June, potentially June 1, if Congress does not raise or suspend the debt limit before then.”

The current debt ceiling, of 31.4 trillion dollars, was reached on January 19 and the Treasury activated “extraordinary measures” to try to pay the bills, but warned that he could only use these measures until the beginning of June.

A source told Reuters that Biden called Republican House Speaker Kevin McCarthy — who is in Jerusalem — as well as House Democratic leader Hakeem Jeffries, Senate Majority Leader Chuck Schumer, and the Republican leader, Mitch McConnell, and invited them to meet on May 9 to discuss the debt ceiling and federal spending.

What is the debt ceiling and why is it rising?

The debt ceiling is the limit amount of money that the Congress of that country allows the federal government to borrow to pay its expenses.such as Social Security and Medicare benefits (a federal agency of the Department of Health), salaries of the armed forces, interest on its national debt, among others. Currently, the ceiling is set at 31.4 trillion dollars, a sum so large that it is equivalent to 120% of the country’s annual economic production.

US debt hit that ceiling in January and the Treasury Department pays its obligations at the limit, suspending investments in some federal pension funds, while it borrows from investors.

The Treasury borrows about 20 cents for every dollar it spends. It was expected that by July or August Washington would stop borrowing and rely solely on tax revenue to pay its bills and default.

The US Capitol dome is seen in Washington, US, April 17, 2023.
The US Capitol dome is seen in Washington, US, April 17, 2023. © Amanda Andrade / Reuters

What if the Treasury can no longer borrow?

In a default scenario, global financial markets would be rocked by investor doubts about the value of US bonds—the mechanism by which they borrow—which are considered one of the safest investments on the planet and are the foundation of the world financial system.

Experts foresee a sure recession if the Government stops paying obligations such as military salaries or Social Security benefits. Millions of Americans would lose their jobs. In fact, hundreds of investors are avoiding buying some US debt securities due in July and August, because the risk of debt default is greater.

Few countries in the world legislate on the debt ceiling. This periodic lifting of the indebtedness limit makes it possible to pay the expenses that Congress previously authorized. For Yellen and other economic policy experts, this cap amounts to a bureaucratic seal on decisions already made and should be removed.

Republicans, who hold a narrow 222-213 majority in the House of Representatives, approved a bill in late April that would raise the debt limit but also set sweeping spending cuts for the next decade.

Why does the ceiling discussion get complex?

Republicans have a slim 222-213 majority in the House of Representatives and passed a bill in April that would raise the debt limit, on the condition that the Biden Administration make big spending cuts for the next decade.

The bill has no chance of passing in the Senate, which is controlled by Democrats. But the speaker of the House of Representatives seeks to force Biden to sit down to negotiate on these spending cuts, while the White House calls for an increase in the debt limit without conditions.

While this is a risky move for the US economy, it has been part of the way politics has been done for decades, and it has gotten worse since 2010.

For example, in 2011, House Republicans successfully used the debt ceiling to impose strong limits on President Barack Obama’s discretionary spending and sent a negative signal to investors by inheriting the first credit rating downgrade in the history of the United States, the largest economy in the world.

This time, the negotiations could be more complex than then, say some 2011 negotiators.

“Republicans’ inability to agree to a clean increase in the debt ceiling has brought America to the brink of economic catastrophe. We learned today that we are potentially a month away from a self-inflicted economic shock that could dwarf the Great Recession.” , and the Republicans are holding our economy hostage, adding to economic instability,” said Senate Budget Committee Chairman Sheldon Whitehouse.

Yellen insisted that “increasing or suspending the debt limit does not authorize new spending commitments or cost taxpayers money. It simply allows the government to finance existing legal obligations that congresses and presidents of both parties have incurred in the past.”

With AP and Reuters

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