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Yellen warns of default risk by October without debt-limit hike

‘We will ensure our nation pays its bills’ – house majority leader.
Janet Yellen. Image: Shawn Thew, EPA/Bloomberg

Secretary Janet Yellen said the Treasury Department will begin special steps next week to avoid breaching the U.S. debt limit as a two-year suspension of the ceiling ends, urging lawmakers to act “as soon as possible” to avert a payment default.

There are scenarios in which the Treasury could exhaust its special measures and run out of cash “soon after Congress returns from recess” in September, Yellen said Friday in a letter to lawmakers. She said cash and such measures are expected to decrease by $150 billion on Oct. 1 alone “due to large mandatory payments.”

Yellen’s warning strikes a more urgent note than a Congressional Budget Office report issued Wednesday saying U.S. lawmakers likely have until October or November to raise or suspend the debt limit. She said the Treasury is unable to provide its own specific estimate of how long so-called extraordinary measures would last amid “heightened uncertainty” over payments and receipts during the coronavirus pandemic.

The letter announced that the Treasury will begin taking special steps by suspending the sale of State and Local Government Series securities at noon on July 30. Additional “extraordinary measures” would begin on Monday, Aug. 2, if Congress has not acted by then.

White House Press Secretary Jennifer Psaki, asked about the letter during a Friday press briefing, played down the development.

‘Ordinary’ step
“It is not out of the ordinary, even though they’re called extraordinary measures, for Treasury secretaries to present to Capitol Hill steps that they are going to take, even as this is being litigated on Capitol Hill,” she said.

“We expect Congress to act promptly to raise or suspend the debt limit and protect the full faith and credit of the United States,” she added.

It’s unclear, however, how or when Congress will act to raise or suspend the limit this time, given that Democrats hold thin majorities in both chambers and most Republicans are unlikely to cooperate. Democrats may be able to raise the limit on their own, either within or separately from a bigger package this fall enacting much of President Joe Biden’s $4 trillion economic agenda through a process known as budget reconciliation, but that still faces political hurdles and the timing is uncertain.

“We will ensure our nation pays its bills, whether it be with Republican support or solely with Democrats because, fundamentally, we are a nation that keeps its promises,” House Majority Leader Steny Hoyer said in a statement responding to Yellen’s notice Friday. “Debt limit brinksmanship has become the norm when Republicans are out of power,” he also said.

‘Irreparable harm’
The debt limit, or the total debt the Treasury can issue to the public and other government agencies, has been on a two-year hold that expires July 31.

A default on payment obligations “would cause irreparable harm to the U.S. economy and the livelihoods of all Americans,” Yellen said in the letter. “Even the threat of failing to meet those obligations has caused detrimental impacts in the past, including the sole credit rating downgrade in the history of the nation in 2011.”

That year, bond yields surged and S&P Global Ratings downgraded the nation’s AAA credit rating after Republican lawmakers initially resisted the urging of then-President Barack Obama to raise the debt ceiling.

© 2021 Bloomberg L.P.

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