Looming risk of debt default, first test for Biden against Republicans

Tick ​​tock, tick tock, the American debt clock is ticking. Washington may have to take “extraordinary measures” as early as next week to avoid a US default, US Treasury Secretary Janet Yellen warned on Friday, sharply raising tensions on the contentious issue between Republicans and Democrats to raise the “debt ceiling”.

In a letter to the new Republican Speaker of the House of Representatives, Kevin McCarthy, the Treasury Secretary stressed that her department is “preparing to launch this month” the first measures, which will affect more pension funds for public service employees. Measures that can only be temporary, the finance minister warns: In the absence of a new ceiling, the United States may find itself in a default situation, a first in the country’s history.

“Spending Out of Control”

“Failure to meet the government’s commitments will cause irreparable harm to the U.S. economy and to the livelihoods of all Americans, as well as to global finance,” Yellen insisted in her letter. But the Republican majority in the House of Representatives could play the clock on the issue to try to force Democrats to roll back certain spending that was voted on before its inauguration.

“Spending is out of control, there’s been no oversight, and it can’t go on,” McCarthy told reporters Thursday, “We’ve got to change the way we recklessly spend money in this country, and we’re going to make sure that’s what’s going to happen”.

The White House, for its part, urged Congress to raise the nation’s debt ceiling and already warned that it had no intention of negotiating with the Republican majority to get a vote on the issue. If lawmakers have previously raised or suspended the cap 78 times since 1960, mostly without problems, the 79th time, in December 2021, has already caused serious tension between the two parties.

The debt of more than 30,000 billion dollars

Republicans, then in the minority, had considered raising the cap to be tantamount to giving the US president a blank check, accusing him of contributing to runaway inflation. For Democrats, the lifting of the limit was only for the purpose of repaying borrowed money, including trillions spent under President Trump.

Congress had finally agreed, at the extreme limit, at midnight on the same day that the previous ceiling was reached, to raise it to $31.381 billion. In her letter on Friday, Janet Yellen emphasizes that raising or suspending the cap “does not mean authorizing new spending,” but simply “authorizing the government to fund the legal commitments that Congress and presidents of both parties have made in the past “.

In a sign of the nervousness that the idea of ​​a potential US default is causing in the markets, the prices of short US Treasuries jumped after the publication of the letter. The yield on one-month Treasury bills rose to 4.43%, the highest level in more than 15 years (September 2007). It had already risen sharply in recent months due to the tightening of monetary policy by the US central bank (Fed).