Treasury takes ‘extraordinary measures’ on debt

WASHINGTON — The countdown to a possible US government default is just around the corner, and tensions between President Joe Biden and Republicans in the House of Representatives are raising concerns about whether the United States can sidestep a potential economic crisis.

The Treasury Department on Thursday said in a letter to Congressional leaders that it has begun taking “emergency measures” as the government eliminated its $38.381 trillion in legitimate borrowing capacity. The artificial debt ceiling has been raised about 80 times since the 1960s.

Markets remain calm for now, given that the government may temporarily rely on accounting adjustments to stay open, and any threats to the economy will appear in a few months. Even many worried analysts are speculating that there will be a deal.

But this particular moment seems more fraught than past clashes with the debt limit due to wide divisions between Biden and new Speaker of the House Kevin McCarthy, who is presiding over a caucus of restive Republicans.

These differences increase the risk that the government may default on political grounds. This could shake financial markets and plunge the world’s largest economy into a completely avoidable recession.

Biden and McCarthy, Calif., have months to reach an agreement as the Treasury Department puts in place “emergency measures” to keep the government running until at least June. But years of increased partisan animosity have resulted in a conflicting set of demands that threaten lawmakers’ ability to work together to fulfill a core duty.

Biden is pushing for a “clean” increase in the debt limit so that existing financial obligations can be met, and refuses to even start negotiations with the Republicans. McCarthy is calling for talks that he believes will lead to cost cuts. It’s unclear how much he wants to cut, or whether his fellow Republicans will back any deal after the hot-tempered start of a new Congress that required 15 ballots to elect McCarthy speaker.

Asked twice on Wednesday if there was evidence that Republicans in the House of Representatives could guarantee the government would prevent a default, White House press secretary Karine Jean-Pierre said it was their “constitutional duty” to fully protect the trust and confidence in the United States. She did not say whether the White House saw signs at this stage that a default was out of the question.

“We’re just not going to negotiate it,” Jean-Pierre said. “They need to feel responsible.”

McCarthy said Biden needed to acknowledge the political realities of 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 in 2019 signed a bipartisan agreement to suspend the debt ceiling.

“Why create a crisis because of this? McCarthy said this week. “I mean we have a Republican House and a Democratic Senate. We have a president there. I think it’s arrogant to say, “Oh, we’re not going to negotiate almost anything,” especially when it comes to funding.”

Any deal must be approved by the Democratic-led Senate. Many Democratic lawmakers are skeptical about working with Republicans who have joined Trump’s Make America Great Again movement. The MAGA movement claimed that the 2020 election lost by Trump was rigged and this lie contributed to the January 6, 2021 uprising at the US Capitol.

“There should be no political brinkmanship with the debt limit,” said Senate Majority Leader Chuck Schumer, DN.Y. “It is foolhardy for Speaker McCarthy and MAGA Republicans to try to use the full faith and credit of the United States as a political bargaining chip.”

To keep the government open, the Treasury Department on Thursday launched a series of accounting maneuvers that halted contributions and repayments of investments in civil servants’ pension and health funds, leaving the government with enough financial space to handle its own affairs. running costs until about June.

What happens if these measures are exhausted without a deal on the debt limit is unknown. A prolonged default could be devastating with market crashes and panic-induced layoffs if confidence in the cornerstone of the global economy evaporates, according to the US Treasury Department.

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 the damage to the US economy.”

The main problem is that the government would have to balance its books on a daily basis if it were not in a position to issue debt. If the government is unable to issue debt, it will have to impose annual cuts equal to 5% of the entire US economy. Analysts say their base case is that the US avoids default.

However, if past revelations of the debt ceiling, such as what happened in 2011, are any guide, Washington could be in a nervous state of suspended animation with little progress until “X-date,” the deadline for the Department’s “emergency measures” finance will be accepted. depleted.

In contrast to the 2011 standoff, the Federal Reserve is actively raising interest rates to bring down inflation and is getting rid of its own US debt, meaning recession fears have already risen among consumers, businesses and investors.

Biden administration officials said they would not prioritize payouts to bondholders if the country passed the “X-date” without an agreement. For years, officials have been exploring this emergency option, which Treasury officials in the administration say is not working because of the government’s payment system.

“To some extent, ’emergency measures’ are a back-up plan, and once they are exhausted, the next step becomes a big question,” Wells Fargo economists wrote in an analysis released Thursday.