Treasury Secretary warns: America may default on debt for the first time in history

Waiting until the last minute could cause serious damage to businesses, shake consumer confidence, raise borrowing costs for taxpayers, and negatively affect the US credit rating for years to come.

The US Treasury has warned that failure to resolve the debt ceiling file will undermine confidence in the dollar

US Treasury Secretary Janet Yellen suggested Tuesday that her department will run out of measures to continue funding the government on October 18, and run out of cash unless Congress raises the federal borrowing ceiling.

After that date, she said in a letter to congressional leaders, "the Treasury Department will have limited resources that will be rapidly depleted, and it is uncertain whether we can continue to meet all of the country's obligations after that date."

Republicans in the US Senate insist on refusing to support any increase in the debt ceiling or suspend the implementation of this ceiling, although they lobbied in this direction under former President Donald Trump.

On Monday, they blocked Democrats' bid to agree to a 14-month ceiling suspension with an interim budget, AFP reported.

Undermining the dollar

In her appearance before the Senate Banking Committee, Yellen repeated the warning of dire consequences if lawmakers fail to act quickly; Including defaulting on debt and undermining the US dollar.

"It is imperative that Congress quickly address the debt ceiling; if it does not, the United States will default for the first time in history," she said in her prepared testimony.

And the House of Representatives approved last week a measure that allows the continuation of the work of government institutions until the third of next December, while continuing the discussion on the main social spending package for 10 years.

But the equally divided Senate has so far refused to open debate on the bill.

Without the approval of the increase, the government will not be able to pay the salaries of public sector employees, the salaries of retirees, or pay the service of state debts.

Yellen said that this "would undermine confidence in the dollar as a reserve currency" and "as a safe haven," adding, "We will be facing a fabricated crisis that we have imposed on this country, which is going through a very difficult stage on its way to recovery."

Despite alarming warnings, including from business groups, Senate Republicans late Monday blocked a House-passed bill to suspend the debt ceiling until December 2022 and avoid government shutdowns, putting pressure on Democrats who They have to find a way to move forward.

Lawmakers face another more urgent deadline to fund the government on Thursday, when the current fiscal year ends.

Raising the debt ceiling does not increase spending, but simply allows the Treasury to fund projects previously approved by Congress, including trillions of dollars in aid decided during the Covid-19 pandemic.

Disaster

Yellen said the spending helped support the country's recovery, which she described as "stronger than that of other rich countries."

But the failure to raise the debt ceiling - which has been approved 78 times since 1960 on the basis of almost always bipartisan consensus - could cause a "catastrophic event for our economy".

"We must address this issue to fulfill the commitments made by the current Congress - and the previous Congress - including those made to address the health and economic impact of the pandemic," Yellen said in her testimony.

In her latest letter to lawmakers, Yellen reiterated that immediate approval is critical because "waiting until the last minute can cause serious harm to businesses, shake consumer confidence, raise borrowing costs for taxpayers, and negatively impact the credit rating of the United States for years to come." ".

"Failure to act quickly could lead to significant turmoil in financial markets, and heightened uncertainty could exacerbate volatility and undermine investor confidence," she said.

According to Bloomberg, Yellen's warning will reinforce financial markets' concerns about the US public debt ceiling crisis in light of the sharp differences between Republicans and Democrats in Congress.

The White House has warned that failure to address the debt ceiling problem could cause a serious financial disaster.

Warning

Federal Reserve Chairman Jerome Powell, who also testified at the hearing, warned of dire consequences, as did a number of former Treasury secretaries and business groups.

In turn, the White House warned that failure to address the debt ceiling problem could cause a serious financial disaster, which could push the United States into another recession.

The US Congress needs to adopt a measure to fund the government before the end of next Thursday to avoid shutting down some federal agencies and operations from Friday morning.

Lawmakers must also move before mid-October to raise the debt ceiling so that the US government does not default, which could destabilize global markets, according to the Qatar News Agency.

Partisan stubbornness

Meanwhile, an article in the " New York Times " warned of the consequences of a federal government default, which would have dire economic consequences.

Author Jim Tankersley said Republicans and Democrats have long been wrangling over raising the debt ceiling, but this time the odds are growing that the United States may default.

The writer added that observers inside and outside Washington are left concerned that neither side will budge in time, and that this will turmoil financial markets and limit the economic recovery emerging due to the decline of the Corona epidemic.

The writer warned of the possibility that partisan intransigence would push the country into an unknown financial situation, and quoted some specialists as saying that the US government’s default would be much worse than the collapse of “Lehman Brothers” in 2008, as it would be devastating to the economy and global markets.

But the writer said other financial analysts believe the two sides will eventually come to an agreement as they have done in the past, largely due to the consequences of the failure.