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. will hit the $31.4 trillion statutory debt ceiling on Jan. 19, forcing the Treasury to initiate extraordinary money management measures that could hold the debt until early 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.

He urged lawmakers to act quickly to raise the debt ceiling to “protect the full faith and credit” of the United States.

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

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 Wall Street about a fierce fight over the debt ceiling this year that could be as destabilizing as the protracted war in 2011, a shortened rating of the U.S. credit rating and years of forced domestic and military spending cuts.

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.”

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House Republicans plan to move a “debt priority” measure by the end of March that would call for continued payments to the U.S. Treasury once the debt ceiling is reached, but details have not been finalized, a person familiar with the plan said. Reuters. The proposal was first reported by the Washington Post.

The Republican plan would call for the Treasury Department to continue paying interest on the debt, the Post reported, citing sources. It could also stipulate that the Treasury continue to pay Social Security, Medicare and veterans’ benefits, as well as fund the military, the newspaper said.

The Post said the plan was part of a personal deal reached this month to resolve a standoff between right-wing hardliners in the House and McCarthy over his election as House speaker.

Yellen’s estimate, which expresses confidence that the government can pay its bills as early as June without raising the ceiling, points to a deadline — the so-called “X date” — in the third quarter of the 2023 calendar year, ahead of some outside budget analysts’ forecasts.

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 conservative in its approach.

Yellen said there is “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.

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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 the savings program for federal government 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.

“Therefore, it is 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 David Morgan, 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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