US reaches debt limit and Treasury prepares emergency measures – 01/19/2023 – Market

The US Treasury Department announced this Thursday (19) that it has begun taking steps to avoid defaulting on government debt, as Congress heads toward a high-stakes showdown between Democrats and Republicans over rising debt ceiling.

These “extraordinary measures” could help reduce the amount of outstanding debt subject to the cap, currently set at $31.4 trillion, but the Treasury warned that these tools would only help for a limited time, likely no more than six months.

“I respectfully urge Congress to act quickly to protect America’s full guarantee,” Treasury Secretary Janet Yellen said in a letter addressed to Republican House Speaker Kevin McCarthy.

Yellen had said last week that “a failure to meet government obligations would cause irreparable damage to the American economy, the livelihoods of all Americans and the financial stability of the world.”

A ‘default’ would damage the credibility of the United States, something that should never happen, warned Jamie Dimon, chief executive of JP Morgan Chase, the country’s main bank.

“We should never question the solvency of the US government,” Dimon said in an interview with CNBC. “This is sacred. It should never happen.”

‘Risky and dangerous’

The world’s largest economy could face serious disruption, with opposition Republicans threatening to push back on raising the legal debt ceiling, which could push the United States into ‘default’.

Far-right Republicans, who now wield significant power over the party’s narrow majority in the House of Representatives, want President Joe Biden to agree to cut public spending.

They argue that radical cuts are needed to reduce debt, which Congress usually agrees to increase each year, raising the so-called debt ceiling.

But the White House said those cuts would affect key military and social security spending programs, or lead to major new taxes.

The White House also pledged that Biden would not negotiate with hard-line Republicans given his “risky and dangerous” opposition to raising the debt ceiling.

‘Budget politics’

Due to the debt limit, the Treasury would not be able to fully apply a part of the Public Service Disability and Retirement Fund, with a “period of suspension of debt issuance” until the beginning of June.

The Treasury will also stop further investment of amounts credited to the Postal Retiree Health Benefit Fund, Yellen said in announcing the latest measures.

The Treasury will begin to reduce its cash balances and resort to accounting techniques and tools to allow the government to continue its functions, said Mickey Levy of Berenberg Capital Markets.

However, according to this analyst, the probability that the US government will default on its debt is close to zero.

“I believe that, ultimately, […] there will be an agreement to raise the debt ceiling, but every now and then there will be a lot of debate and bitter politics,” Levy told AFP.

However, if things continue as they are, spending will continue to rise and raise the debt, he said, who also added that much of that spending goes to programs like Social Security and the federal health plan Medicare.

“The political will to really address these programs is simply not there,” he said.