Yellen wants debt ceiling raised by August 2, warns US may need ‘extraordinary measures’ to avoid default

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U.S. Treasury Secretary Janet Yellen answers questions during the Senate Appropriations Subcommittee hearing to examine the Treasury’s FY22 budget request on Capitol Hill in Washington, D.C., June 23, 2021.

Greg Nash | pool | Reuters

Treasury Secretary Janet Yellen warned Congress on Friday that her department would need to initiate “extraordinary measures” on August 2 to prevent the US government from defaulting if lawmakers cannot strike a deal to raise or extend the debt ceiling.

In a letter to House Speaker Nancy Pelosi, a Democrat from California, Yellen notified lawmakers that at the end of July the Treasury would suspend the sale of bonds, which is how the United States finances its debt obligations.

After August 2, unless a debt-limit agreement is reached, the Treasury will begin taking “extraordinary measures” to pay Congress’ legal and financial obligations, a temporary fix that allows the secretary to tap into additional government accounts for weeks.

“The period of time during which extraordinary measures may continue is subject to a great deal of uncertainty due to a variety of factors, including challenges to forecasting payments and revenue for the United States government months into the future, exacerbated by increased uncertainty in payments and related receipts,” Yellen told Pelosi. in a message.

The letter between the Secretary of the Treasury and the Speaker is a formality required if the debt owed to the United States approaches its legal limit. Although extraordinary measures have been deployed in the past to prevent defaults, it is unclear how long the Yellen emergency capital will continue to face the unprecedented stimulus efforts sparked by the COVID-19 crisis.

While the United States has never defaulted on its debt, recent history shows that getting too close to it uncomfortably can create chaos. In 2011, the House Republicans’ refusal to pass an increase in the debt ceiling lowered the US sovereign credit rating, upsetting financial markets.

Economists say a default, although highly unlikely, would be a catastrophic event and a major threat to many sectors of the US economy.

Asked about Yellen’s letter, White House Press Secretary Jen Psaki stressed the need to take the communication in context, and noted that similar messages had been sent in previous administrations.

Psaki said Friday afternoon that the letter is “standard practice for Treasury ministers when a debt limit is re-imposed.” “During the previous two administrations, the Secretary of the Treasury sent nearly 50 letters to Hill regarding the debt limit, some of which were very similar, in wording, question, and updates, to this letter.”

Despite the administration’s calm, it is almost certain that Congress will breach the August 2 deadline with Democrats and Republicans deadlocked on several key legislation. Perhaps most notably, Senate Majority Leader Chuck Schumer, of New York, is still far from settling on a trillion-dollar physical infrastructure deal.

House Democrats insist they won’t pass a bill to improve the nation’s roads, bridges, broadband and waterways without separate legislation along the lines of President Joe Biden’s American families plan to support paid leave for workers, work education and other programs.

Senate Minority Leader Mitch McConnell, Republican of Kentucky, told Punchbowl News earlier this month that he “can’t imagine a single Republican” voting to raise the debt limit among Democrats “free for all for taxes and spending.”

CNBC’s Kevin Breuninger contributed to this report.

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