Failure to raise debt ceiling would be an ‘economic catastrophe,’ Yellen

• US Treasury Secretary Janet Yellen warned of an “economic catastrophe” if the U.S. fails to raise its debt ceiling in the coming weeks. 
• Yellen’s comments came as a political stalemate over raising the debt limit was forcing the Treasury Department dangerously close to a worst-case scenario: a potential U.S. debt default.
• President Joe Biden will meet Tuesday with the four top leaders of Congress. The White House says it will not negotiate over the debt limit, but Republicans say the meeting proves the president is coming to the table.

WASHINGTON — Failure to raise the U.S. debt ceiling would cause an “economic catastrophe,” Treasury Secretary Janet Yellen said Monday.

“That is something that could produce financial chaos, it would drastically reduce the amount of spending and would mean that Social Security recipients and veterans and people counting on money from the government that they’re owed, contractors, we just would not have enough money to pay the bills,” Yellen told CNBC’s “Closing Bell: Overtime.”

Yellen’s comments came as a political stalemate over raising the debt limit was forcing the Treasury Department dangerously close to a worst-case scenario: a potential U.S. debt default. This would occur if Treasury were to exhaust the extraordinary measures it implemented earlier this year to meet its obligations after the U.S. reached its statutory debt limit of $31.4 trillion.

In order to avoid a default on the nation’s debt, Congress must vote to either raise or suspend the debt limit before Treasury runs out of emergency funding. But with only eight days left this month during which both the House and the Senate are scheduled to be in session at the same time, time is running out to reach a deal.

“There’s a very big gap between where the president is and where the Republicans are” on raising the debt ceiling, Yellen said.

Treasury and the Congressional Budget Office both released new reports last week predicting that extraordinary measures could be exhausted as early as June 1, which was sooner than Wall Street or the White House had been expecting. The new, earlier date was the result of lower-than-expected federal tax revenues in April.

On Tuesday, Biden  hosted a high-stakes meeting at the White House with the four top leaders of Congress: House Speaker Kevin McCarthy, R-Calif., House Minority Leader Hakeem Jeffries, D-N.Y., Senate Majority Leader Chuck Schumer, D-N.Y., and Senate Minority Leader Mitch McConnell, R-Ky.

The White House says the meeting will not include negotiations on raising the debt limit, which Biden says Republicans must agree to raise without preconditions. So far, Republicans have refused to approve a debt ceiling hike unless it is accompanied by sweeping cuts to federal spending.

Economists on both sides of the aisle agree that even a very brief default would send shock waves through equities markets and send interest rates soaring.

“Short-term funding markets, which are essential to the flow of credit that helps finance the economy’s day-to-day activities, likely would shut down as well” in the event of a default, said Mark Zandi, chief economist of Moody’s Analytics, at a Senate hearing in March.

The looming debt ceiling crisis has also forced Yellen to “compress” her trip to Japan this week. She is scheduled to attend a meeting of G-7 finance ministers and central bankers.

Yellen’s core priorities for the summit will be “strengthening the global macroeconomy, redoubling our commitment to Ukraine as it defends itself against Russia’s barbaric war and third, our work to bolster economic resilience and security,” the Treasury Department said in a statement Friday.

Behind the scenes, the secretary is also likely to face questions from her G-7 counterparts about the debt ceiling debate and the prospect of a U.S. default. “If we were to compromise the credit rating of the United States, and even worse to default on the debt, I think that would have an adverse impact on the dollar’s use as a reserve currency,” Yellen told CNBC.

“The dollar is regarded as the bedrock, safe asset in the entire global financial system. It’s trusted, and it is the ultimate safe asset and a failure to raise the debt ceiling, impairing the U.S. credit rating, would put that at risk,” she said. “So that is a real concern.”

No agreement

Top U.S. lawmakers emerged frustrated and empty-handed after a tense Tuesday meeting with President Joe Biden over the nation’s debt limit. Biden sought to calm global financial jitters, saying he thought the meeting was “productive” and that the group would meet again Friday as the U.S. stares down the possibility of defaulting on its financial obligations for the first time in history.

Biden met Tuesday afternoon with Republican House Speaker Kevin McCarthy and Senate Minority Leader Mitch McConnell, as well as Democratic House leader Hakeem Jeffries and Senate Majority Leader Chuck Schumer, in a bid to ensure the government can borrow more money to pay for spending it has already incurred.

Afterward, Biden expressed optimism over a future deal. However, he reiterated that he will continue to insist that Congress lift the debt ceiling.

“I made it clear during our meeting that default is not an option,” he said. “I repeated that time and again, ‘America is not a deadbeat nation.’”

Republicans are insisting that the federal government reduce spending before they will agree to raise the debt ceiling. Meanwhile, Biden is adamant that Congress has a duty to pay its bills and that the two issues should be addressed separately. The two sides blame each other for the impasse, and Biden said “a default would be disastrous.”

“Everyone in the meeting understood the risk of default: our economy would fall into a significant recession, it would devastate retirement accounts, increase borrowing costs,” Biden said. “According to Moody’s, nearly 8 million Americans would lose their jobs, and our international reputation would be damaged in the extreme.”

But McCarthy emerged from the meeting clearly disappointed that no progress had been made.

“I didn’t see any new movement,” McCarthy said. He added: “I asked him numerous times, ‘Are there some places we could find savings?’ He wouldn’t give me any.”

However, McConnell sought to assure Americans that the U.S. will continue to pay its debts.

“The United States is not going to default,” he said. “It never has and it never will.”

Default a ‘gift’ to adversaries

Earlier in the day, the White House warned that the United States defaulting on its debts would be “a gift” to adversaries, including China and Russia, and would lead to a recession that could send shock waves across the global economy.

“Default would create global uncertainty about the value of the U.S. dollar and U.S. institutions and leadership, leading to volatility in currency and financial markets and commodity markets that are priced in dollars,” White House press secretary Karine Jean-Pierre said during a press briefing on Tuesday.

Ceiling raised 3 times under Trump

Lifting the debt ceiling was once a routine vote. Congress has raised it 78 times since 1960, 29 times under Democratic presidents and 49 times under Republican presidents, including three times under former President Donald Trump.

How would a US default affect the world?

The U.S. economy is the largest in the world, and the dollar is considered the world’s reserve currency, meaning that many countries’ central banks and other monetary authorities hold U.S. dollars as part of their foreign exchange reserves as a backup in case their own currency fails.

CNBC/ VOA/ Agencies