Yellen warns of risk of US default by 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 the full faith and credit of America, 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 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. It’s something that has to be done.”

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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 — that the government will reach its cash and borrowing capacity — known as the “X date” — by the third quarter of calendar 2023.

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.

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, which is 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.

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“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; By David Lauder; Editing by Tim Ahmann, Diane Croft and Andrea Ritchie

Our Standards: Thomson Reuters Trust Principles.

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