Treasury Secretary Yellen’s announcement with an extension from the previous date of June 1 came after she and the Treasury Department reviewed the latest economic estimates of when the U.S. will hit the debt ceiling
“Based on the most recently updated information, we estimate that the Treasury Department does not have sufficient resources to meet the government’s obligations unless Congress raises or temporarily removes the debt ceiling on June 5,” writes the Treasury Secretary in a letter to Republican Kevin McCarthy, who is the speaker of the House of Representatives.
Yellen added a warning in the letter, saying “difficult hardships lie ahead” if Congress remains passive in coming to a solution.
Difficult stumbling blocks
The finance minister met on Friday with the head of the International Monetary Fund (IMF), Kristalina Georgieva, who warned Yellen of the crisis the world economy would face if no agreement was reached.
The Republicans in the House of Representatives have been opposed to the expansion of the authority, which costs the equivalent of SEK 860 billion and is part of President Joe Biden’s investment in, among other things, green investments (called the “Inflation Reduction Act”).
House Republican Speaker Kevin McCarthy looks set to push through a reduction in that spending, CNBC reports, citing sources.
The opposition is also said to get through a broad cut of investments in the social insurance system and other investments.
– We have to spend less than we did last year. That’s our starting point, said McCarthy on Friday morning, local time.
Trying to wave away
In exchange, the Democrat-controlled White House will receive an increase in the debt ceiling that extends over two years – and thus postpones the issue until after next year’s presidential election.
Both sides issued positive statements Thursday about progress in the negotiations. Biden tried to wave away the worst concerns that the US would have to suspend its payments.
– I believe we will reach an agreement that allows us to move forward and that protects all hard-working Americans, he said at a press conference.
Formally, the US hit the debt ceiling – of 31,400 billion dollars – already in January. But the Ministry of Finance has since been able to pay for itself by shuffling around existing resources. However, Finance Minister Janet Yellen has warned that at the beginning of June it will no longer be possible to handle the payments in this way.
The consequences would be dramatic and force drastic political measures. Most expect the US to go to great lengths to keep up with its interest payments and repayments – to avoid a global financial market catastrophe.
The austerity that would be necessary without new loans would therefore hit retirees and other beneficiaries within the US social security system very hard and also mean suspended payments to suppliers and ongoing operations – including defense. This scenario would create a deep recession in the world’s largest economy, according to SEB’s economists.
Sources: Bloomberg, SEB, The Wall Street Journal.
Tags: Extended deadline calculated debt ceiling
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