US takes ‘extraordinary measures’ to prevent default as debt ceiling is reached Pipa News

US takes ‘extraordinary measures’ to prevent default as debt ceiling is reached

The countdown to possible bankruptcy of the US government is on the horizon, and friction between President Joe Biden and Republicans in the House is raising alarms about whether the United States can evade a potential economic crisis.

The Treasury Department said in a letter to congressional leaders on Thursday that it has begun taking “extraordinary measures” as the government has polished its US$38.381 trillion statutory borrowing capacity. The debt ceiling, an artificial ceiling, has been raised about 80 times since the 1960s.

Markets remain calm so far as the government can temporarily rely on accounting adjustments to stay open and any threats to the economy are several months away. Even many concerned analysts are assuming a deal will happen.

But this particular moment seems more fraught than the past, due to the stark differences between Biden and new House Speaker Kevin McCarthy, who presides over a troubled Republican caucus.

These differences increase the risk that the government will fail to meet its obligations for political reasons. That could rattle financial markets and plunge the world’s largest economy into an entirely avoidable recession.

Biden and McCarthy, a Republican from California, have several months to come to an agreement as the Treasury Department imposes “extraordinary measures” to keep the government running until at least June. But years of growing animosity between parties has led to a conflicting set of demands that jeopardizes lawmakers’ ability to work together on a basic task.

Biden is pushing for a “clean” increase in the debt limit so that existing financial commitments can be sustained and refuses to even start talks with Republicans. McCarthy is calling for negotiations that he believes will lead to budget cuts. It’s unclear how much he wants to downsize and whether fellow Republicans would support a deal after a shaky start to the new Congress that required 15 rounds of voting to elect McCarthy as chairman.

Asked twice on Wednesday whether there was evidence that House Republicans can ensure the administration avoids bankruptcy, White House Press Secretary Karine Jean-Pierre said it is their “constitutional responsibility” to have the full faith and protect the honor of the United States. She did not say whether the White House saw any signs at this stage that a default was off the table.

“We’re just not going to negotiate that,” said Jean-Pierre. “They need to feel the responsibility.”

McCarthy said Biden needs to recognize the political reality that comes with a divided government. The speaker equates the debt ceiling with a credit card limit and calls for a level of fiscal restraint not seen under President Donald Trump, a Republican who signed a bipartisan suspension of the debt ceiling in 2019.

“Why create a crisis over this?” McCarthy said this week. “I mean, we have a Republican House, a Democratic Senate. We have the president there. I think it’s arrogance to say, ‘Oh, we’re going to negotiate virtually nothing,’ and especially when it comes to funding.”

House Republican Leader Kevin McCarthy (left) and Senate Majority Leader Chuck Schumer brace for a battle over the debt ceiling. (Kevin Lamarque/Reuters)

Any deal would have to pass the Democrat-led Senate. Many Democratic lawmakers are skeptical of the ability to work with Republicans who join the “Make America Great Again” movement started by Trump. The MAGA movement has claimed that the 2020 election lost by Trump was rigged, a lie that contributed to the January 6, 2021 riot at the US Capitol.

“There should be no political conflict with the debt limit,” said Senate Majority Leader Chuck Schumer. “It is reckless of Speaker McCarthy and MAGA Republicans to attempt to use the full confidence and honor of the United States as a political bargaining chip.”

‘Extraordinary measures’ in progress

To keep the government open, the Treasury Department launched a series of accounting maneuvers on Thursday that would halt investment contributions and repayments to government workers’ pension and health care funds, giving the government enough financial room to handle its day . -daily expenses until about June.

What happens if these measures are exhausted without a debt limit agreement is unknown. A prolonged default could be devastating, with markets collapsing and panic-induced layoffs if confidence in a cornerstone of the global economy were to evaporate, the U.S. Treasury said.

Analysts at Bank of America warned in a report last week that “there is a high degree of uncertainty about the speed and extent of damage to the US economy.”

The underlying challenge is that the government would have to balance its books on a daily basis if it is unable to issue debt. If the government cannot issue debt, it would have to impose spending cuts equivalent to 5 percent of the total US economy on an annual basis. Analysts say their base case scenario is that the US avoids default.

But if debt-ceiling confrontations of the past, such as those of 2011, are any guideline, Washington could be in a nervous state of suspended animation with little progress until the “X date,” the deadline by which the “extraordinary measures” of the Treasury are executed. exhausted.

Unlike the 2011 confrontation, the Federal Reserve is actively raising interest rates to lower inflation and rolling down its own US debt, meaning recession fears are already high among consumers, businesses and investors.

Biden administration officials have said they will not prioritize payments to bondholders if the country passes “X date” without an agreement. Over the years, officials have studied this contingency option, which Treasury officials say is unworkable due to the government’s payment system.

“To some extent, the ‘extraordinary measures’ are the backup plan, and once those are exhausted, the next step is a big question mark,” Wells Fargo economists wrote in an analysis Thursday.


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