Yellen warns of US default risk in June, calls for debt limit hike

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WASHINGTON, Jan 13 (Reuters) – U.S. Treasury Secretary Janet Yellen said on Friday that the United States is likely to hit the $31.4 trillion statutory debt limit on Jan. to launch extraordinary cash management measures that can probably avoid defaults before the beginning of the year. June.

“Once that threshold is reached, the Treasury will need to begin taking certain extraordinary steps to prevent the United States from defaulting on its obligations,” Yellen said in a letter to new Speaker of the House Kevin McCarthy and other leaders. of Congress.

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

“While Treasury is unable to provide an estimate of how long the extraordinary measures will allow us to continue to pay government obligations, it is unlikely that the money and extraordinary measures will run out before early June,” the letter added.

Republicans now in control of 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 about a bruising fight over the debt ceiling this year, which could be at least as disruptive as the protracted battle in 2011 that led to a brief downgrade of the US credit rating and years of forced internal and external pressure. military spending cuts.

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

“This must be done without conditions,” White House spokeswoman Karine Jean-Pierre told reporters. “There will be no negotiation on this. This is something that must be done.”

Yellen’s estimate, expressing confidence that the government could pay its bills only through early June without raising the cap, marks a deadline considerably earlier than forecasts by some outside budget analysts that the government would run out of cash and capacity. of indebtedness – the so-called “Date X” – sometime in the third calendar quarter of 2023.

Analysts have noted that some Treasuries maturing in the second half of the year have a premium on their yields that may be linked to heightened risk of default in that window.

“You could read this in part as an attempt to get Congress to act sooner rather than later,” said Shai Akabas, director of economics at the Bipartisan Policy Center, adding that the Treasury was being conservative in its approach.

Yellen said there is “considerable uncertainty” about how long extraordinary measures can stave off default, due to a variety of factors, including the challenges of predicting government payments and revenue months into the future.

SUSPENDED PENSION INVESTMENTS

On Wednesday, Treasury data showed the US federal debt was $78 billion short of the threshold, with a Treasury operating cash balance of $346.4 billion. On Thursday, the department reported an $85 billion shortfall in December as revenues fell and spending rose, mainly for debt interest costs.

Yellen said in her letter that Treasury plans this month to suspend new investments in two government retirement funds for pensions and health, as well as suspend reinvestments in the Government Securities Investment Fund, or G Fund, part of a savings plan for federal employees. Retirement investments are restored once the debt ceiling is raised.

“The use of extraordinary measures allows the government to fulfill its obligations 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 limit. Failure to meet government obligations would cause irreparable damage to the US economy, the livelihoods of all Americans, and global financial stability” , wrote Yellen.

Reporting by Kanishka Singh and David Lawder; Additional reporting by Richard Cowan and Ismail Shakil; Written by David Lawder; Editing by Tim Ahmann, Diane Craft and Andrea Ricci

Our Standards: Thomson Reuters Trust Principles.

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