Treasury Secretary Janet Yellen said the department doesn’t prioritize some bills over others, and that any non-payment of obligations is a default that would “undoubtedly” trigger a recession.
(Bloomberg) — Treasury Secretary Janet Yellen said the department doesn’t prioritize some bills over others, and that any non-payment of obligations is a default that would “undoubtedly” trigger a recession.
“Failure on the part of the United States to meet any obligation — whether its debt holders, to members of our military or to Social Security recipients — is effectively a default,” Yellen said Friday while speaking with reporters in Dakar, Senegal.
Congress “really cannot negotiate over whether or not we’re going to honor our obligations,” Yellen said, adding that “Treasury systems have all been built to pay all of our bills when they’re due and on time, and not to prioritize one form of spending over another.”
Some House Republicans, as well as analysts, have floated the idea that the Treasury Department could, if necessary, prioritize some payments, perhaps the interest on US Treasuries, if it comes very close to running out of cash. That would reduce the damage inflicted on financial markets.
The Treasury chief informed congressional leaders in a letter Thursday that the federal debt limit had been reached and her department had begun using special measures to avoid a US payments default. In an earlier letter, Yellen told lawmakers that so-called extraordinary measures would probably allow the Treasury to continue covering its bills through early June, but she warned that estimate is “subject to considerable uncertainty.”
Recession Warning
After that point, payments would be at risk in a year that some economists already think is more likely than not to include a mild US recession.
A failure to make payments would “undoubtedly cause a recession in the US economy,” Yellen said in an interview on CNN International Friday. “Many people would lose their jobs and certainly their borrowing costs would rise.”
That’s because a default would “at a minimum” trigger a debt downgrade, Yellen said, undermining the dollar’s position as the world’s reserve currency as foreign governments lose confidence in the country’s ability to pay its bills.
Republican leaders and the White House are currently engaged in a stare-down over how to handle the debt limit, with President Joe Biden saying it isn’t up for negotiation and pushing for an increase without conditions.
Biden said Friday that he would discuss the debt limit with Speaker Kevin McCarthy, who is trying to wrangle members of a factious GOP-led house that want to use the debt-ceiling crisis to force Democrats’ hand on major cuts to Social Security and Medicare.
The Treasury probably now has $350 billion to $400 billion of headroom available in all, said Gennadiy Goldberg, a senior US rates strategist at TD Securities. That, along with the influx of revenue that will come from individual income taxes due in April, should let the Treasury go until sometime in the July to August window without running out of cash, he said.
If no deal is struck in Congress to raise the limit, the US government would default, potentially triggering a crisis in the market for US Treasuries, which serve as a benchmark for debt securities worldwide.
–With assistance from Megan Howard.
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