Yellen reinforces debt default warning before Biden-McCarthy talks

US government could run out of money in two weeks

Treasury Secretary Janet Yellen has warned of 'catastrophic' consequences if the US runs out of cash to pay its bills. AFP

Treasury Secretary Janet Yellen said on Monday that new data has reinforced an earlier warning that the US could default on its debts as early as June 1.

Her comments come before crunch talks on Tuesday between President Joe Biden and congressional leaders.

The Treasury has warned of “catastrophic” consequences if the US runs out of cash to pay its bills, which would leave it unable to pay federal workers and trigger a likely surge in interest rates with a huge impact for businesses and mortgage holders.

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Biden accuses Republicans of holding economy hostage over US debt ceiling

“We still estimate Treasury will likely no longer be able to satisfy all of the government's obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1,” she wrote in a letter to the Republican Speaker of the House of Representatives Kevin McCarthy.

The talks have a lot of ground to cover, with the two parties still sharply divided on the terms under which they will agree to lift the government's borrowing cap to pay for existing spending commitments.

Republicans continue to insist that Mr Biden agree to significant spending cuts in exchange for their support to raise the debt ceiling, while Democrats have been calling for a “clean” increase of the borrowing limit with no strings attached.

What is the US debt ceiling?

They have accused Republicans of using extreme tactics to push their political agenda ahead of the so-called X Date — the point at which the US will be unable to meet its financial obligations.

The non-partisan Congressional Budget Office has forecast that the X Date could be reached by June 15.

Still 'far apart'

House, Senate and White House negotiators met at the weekend in a bid to make progress before the talks, US media reported.

Mr McCarthy has signalled the two sides still have much to hammer out.

“I still think we're far apart,” he told reporters on Monday at the US Capitol.

“It doesn't seem to me yet that they want a deal.

“They're not talking anything serious. It seems more like they want a default than a deal.”

Republicans, who regained control of the House in the midterm elections, are using their newfound political clout to demand deep cuts of roughly $130 billion from federal agencies and programmes in exchange for their support, limiting spending in the 2024 fiscal year to 2022 levels.

They also want to expedite domestic energy production projects, simplify the process for obtaining permits for pipelines and refineries, claw back unspent Covid relief funding and impose work requirements for social programmes.

Mr Biden has rebuffed many of these proposals, accusing Republicans of “holding the economy hostage” to further their political objectives.

Including Monday, there are only four days remaining when the House and Senate are both in session before June 1.

Some senators have acknowledged that they may have to cancel the Memorial Day recess beginning on Thursday to get a deal finalised, although there is no official plan to do so.

In recent days, Mr Biden has suggested he may have to postpone a planned trip to Asia this week if the two sides fail to reach agreement, but has stopped short of cancelling his visit while the talks continue.

Updated: May 15, 2023, 10:27 PM