US Debt Negotiation on the Brink... Yellen Warns "Will Cause Economic and Financial Disaster"

by Jo Youjin

Published 26 Apr.2023 08:44(KST)

U.S. Treasury Secretary Janet Yellen warned that if the U.S. Congress fails to reach an agreement to raise the debt ceiling, it would cause an "economic and financial catastrophe" due to a default. As expectations arise that the Treasury's cash reserves could be depleted as early as early June if the debt ceiling negotiations are not concluded, the standoff between the Democratic and Republican parties is escalating to extremes.

On the 25th (local time) at a conference held in Washington DC, Secretary Yellen acknowledged President Joe Biden's achievements in leading a 'historic recovery' from the COVID-19 pandemic, warning that "the partisan standoff over raising the debt ceiling could threaten all the progress we have made over the past two years."

She emphasized that the economic policies pursued by the Biden administration during the unprecedented crisis caused by the COVID-19 pandemic could be rendered futile, urging Congress to expedite the resolution of the debt ceiling negotiations. Bloomberg News reported that Secretary Yellen is expected to deliver to Congress an estimate of the 'X Day'?the day when the Treasury's cash reserves run out?as early as this weekend.

The debt ceiling is a limit set by Congress on the amount of money the U.S. government can borrow, currently set at $31.381 trillion. The Biden administration previously requested Congress to raise the debt ceiling, but the Republicans rejected it, linking it to government spending cuts. Ultimately, when the Treasury reached the debt ceiling in January, it took special measures to temporarily ease the situation and requested Congress to either raise the debt ceiling or grant a suspension.

[Image source=UPI Yonhap News]

However, the gap between the Democratic and Republican positions remains wide. On the same day, the White House responded that if the Republican budget plan, which includes large-scale spending cuts as a condition for raising the debt ceiling, passes both the House and Senate, President Biden would veto it. The White House strongly opposed the Republican budget plan, calling it a "reckless attempt to extract extreme concessions by conditioning budget cuts on debt already incurred." The White House maintains that negotiations can only proceed if both parties present a proposal that is somewhat agreeable.

Earlier, the Republicans submitted a budget plan to Congress that would raise the debt ceiling by $1.5 trillion until March 31 next year, in exchange for $130 billion (approximately 170 trillion won) in federal budget cuts next year. Republican House Speaker Kevin McCarthy pressured, saying, "If Washington wants to spend more, we need to find savings together, just like many ordinary American households do every day," adding, "A debt ceiling increase without conditions will not pass."

Initially, the 'X Day' was expected to be around July to September, but based on treasury depletion and sluggish tax revenues, it is now anticipated to be moved up to early June. U.S. investment bank Goldman Sachs analyzed that the country's coffers are not receiving funds, citing a 29% decrease in tax revenue inflows in April compared to the same month last year.

Concerns over default have heightened tensions in the bond market. On the day, the 1-year U.S. Treasury CDS premium rose by an additional 12 basis points (1bp = 0.01%) to 115.83bp compared to the previous day, reaching the highest level since 2008. As the likelihood of default within 2 to 3 months increases, the interest rate spread between 3-month and 1-month U.S. Treasury bills has widened to an all-time high.