US Treasury Secretary Janet Yellen has reiterated warnings that the country could face economic catastrophe if Congress does not promptly raise its debt ceiling. Yellen urged lawmakers to take immediate action before the current borrowing limit expires at the end of May. The Republican Party has been pushing for a debt ceiling increase that is tied to spending cuts, while the White House is advocating for a “clean” hike.
In a banking conference held on 24 May, Yellen made her most pressing warning yet, stating that “time is running out” and “the livelihoods of millions of Americans hang in the balance.” Yellen has also contemplated using the 14th amendment as a last-ditch move to raise the ceiling on her own if Congress doesn’t act.
Failure to raise the debt limit could see the US unable to meet its debt obligations, leading to a default and severe economic consequences, including worldwide panic, margin calls, runs, and firesales. Yellen said that the US Treasury market is the bedrock of the global financial system and any default would crack open the foundations upon which it is built.
President Joe Biden held a meeting with Republican and Democratic lawmakers on 25 May to discuss raising the debt ceiling before the country runs out of money in June. Though described as “modest but higher” than last week’s meeting, which failed to yield a solution, the meeting is crucial, with House Speaker Kevin McCarthy warning that the deal needs to happen by the end of this week for Congress approval before June 1. The meeting included the Treasury Secretary, while press members were excluded.
The US is set to hit its debt ceiling in July and will risk its credit rating if it falls behind on payments. Potential scenarios arising from failing to increase the debt limit include rattled markets, a downgrade in credit rating, and even canceling Biden’s trip to Australia. Republicans have indicated that there will be no ceiling raise without considerable spending cuts and changes to entitlement programs. The Democrats are also seeking to expand the negotiations to include spending on their proposed social and climate programmes.
There is now growing concern among economists that a default would trigger a market selloff, raise borrowing costs, and have knock-on effects on the global economy comparable to the 2008 crash. With time running out, a resolution to the US debt ceiling issue is becoming increasingly urgent.
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