US Treasury Secretary Warns of Possible US Default in October

Yellen "All Cash Likely Depleted by October... Will Cause Irreparable Damage"
Biden Budget Plan Sparks Partisan Conflict... Debt Ceiling Agreement Faces Difficulties

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Suhwan] The U.S. Treasury Department has strongly warned that if Congress does not take action to adjust the federal government debt ceiling, a government default could occur as early as October.

On the 8th (local time), U.S. Treasury Secretary Janet Yellen stated in a letter sent to the Democratic and Republican leadership of the House and Senate that "if all available means and cash on hand are exhausted, the United States may be unable to meet its (repayment) obligations for the first time in history."

She added, "It is highly likely that cash and available emergency measures will be fully depleted by October."

The United States sets the federal debt ceiling by law. In 2019, both parties agreed to suspend the setting of the ceiling until July 31 of this year, allowing the federal government to issue bonds.

However, amid disputes over President Joe Biden's infrastructure budget, the parties failed to enact follow-up legislation.

As a result, the debt ceiling was reinstated on August 1. With the federal debt already exceeding the ceiling, the Treasury Department has been using remaining cash and emergency measures to secure necessary funds.

Secretary Yellen warned that these emergency measures could also be exhausted by October, potentially leading to an unprecedented default in U.S. history.

In the event of a default, the government would be unable to issue additional Treasury bonds and would fail to pay social security benefits and support payments to veterans.

Yellen emphasized that a default would cause "irreparable damage to the U.S. economy and global financial markets," urging Congress to adjust the debt ceiling.

However, the opposition Republican Party argues that the $3.5 trillion budget proposed by President Biden would increase national debt and taxpayer burdens, and they refuse to pass debt-related legislation unless the budget size is reduced.

Particularly, with disagreements within the ruling Democratic Party over the budget size causing negotiation difficulties, the Wall Street Journal (WSJ) reported that the debt ceiling legislation has been deprioritized.

In response, Treasury and White House officials have been directly contacting Democratic congressional staffers to continuously stress the necessity of adjusting the debt ceiling.

Joseph Brusuelas, an economist at consulting firm RSM US, pointed out, "Amid concerns over the spread of the Delta variant and increasing economic risks, there is no room to endure an economic crisis caused by political conflicts."

Previously, during the 2011 debt ceiling crisis, negotiations between the parties over adjusting the debt ceiling were prolonged and difficult. As a result, Standard & Poor's (S&P) downgraded the U.S. long-term Treasury credit rating from AAA to AA+ for the first time in about 70 years.

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