US default would cause ‘irreparable’ harm, warns Yellen again

Sept. 30 (Reuters) – Treasury Secretary Janet Yellen agreed on Thursday that any default on US debt would cause irreparable damage and the ensuing financial crisis and recession.

Yellen, to whom a member of the House financial services committee asked if the damage caused by the federal government’s failure to meet debt obligations would be “irreparable”, replied, “Yes.”

His remarks were the latest in a series of serious warnings Yellen has issued as Congress remains deadlocked on whether to lift or suspend the debt limit amid wrangling over the legislative agenda of the Democratic majority and the Biden administration. Read more

Yellen said the government would be cash-strapped around Oct. 18 unless Congress raises the federal debt limit, currently capped at $ 28.4 trillion. After that date, the Treasury would be “simply in an impossible situation,” Yellen said in an appearance before the committee Thursday. “We will not be able to pay all the government bills.”

The debt ceiling came back into effect in August after a two-year suspension, and the Treasury Department has since used “extraordinary measures” to fund the government. Yellen earlier this week told lawmakers that these measures would be exhausted by mid-October, sooner than most analysts had predicted, after which the government will not have enough funds to meet all of its obligations, ranging from social security payments to principal and interest due. on treasury bills, notes and bonds.

Failure to meet these obligations would mark the United States’ very first default, which Yellen said would be “a disaster.”

“We’re probably going to end up with a financial crisis, definitely a recession,” Yellen told the House committee Thursday. It would also have “longer term consequences of higher interest rates for all who borrow.”

This is because the credit rating of the United States would certainly be reduced, and international creditors who have long held Treasury debt securities on the basis that they are secured by “full faith and credit” of the US government would no longer view these securities as “risk-free.” “It would make it more expensive for the federal government – and everyone else – to borrow.

Federal Reserve Chairman Jerome Powell has said that the ability of the US central bank to contain the fallout from such an event is limited.

“No one is assuming that there is really much we can do,” Powell told lawmakers Thursday. “No one should assume that the Federal Reserve or anyone else can protect the American people from the consequences of this.”

Reporting by Dan Burns; Editing by Chizu Nomiyama and Andrea Ricci

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