Yellen warns of 'unthinkable' US default risk in August without debt limit hike

Dr Janet Yellen also sparred with Republican senators over inflation concerns. PHOTO: AFP

WASHINGTON (REUTERS) - United States Treasury Secretary Janet Yellen on Wednesday (June 23) warned Congress that the US risks a debt default and a new financial crisis as soon as August if lawmakers fail to act quickly to suspend or raise the federal borrowing limit.

In testimony to a Senate appropriations sub-committee, Dr Yellen said defaulting on US debt obligations would be "unthinkable" and "would have absolutely catastrophic economic consequences".

Dr Yellen said that to avoid uncertainty for financial markets, Congress should pass new debt limit legislation - allowing the Treasury to continue borrowing - before the latest suspension expires on July 31.

A first-ever default on US government debt obligations "would precipitate a financial crisis, it would threaten the jobs and savings of Americans at a time when we're still recovering from the Covid pandemic", Dr Yellen said.

"I would plead with Congress to simply protect the full faith and credit of the United States by acting to raise or suspend the debt limit as soon as possible."

The Treasury in the past has been able to stave off potential default for several months by employing extraordinary cash flow management measures such as suspending contributions to government employee pension funds.

Asked how long these measures could last, Dr Yellen said spending on Covid-19 relief programmes has added more uncertainty to government payment flows.

The Treasury's extraordinary measures could be exhausted in August, when Congress takes its traditional summer recess, she said.

At that point, the Treasury would only be able to rely on tax receipts to pay obligations, eventually making it impossible to make some debt repayments without new borrowing.

Dr Yellen told the hearing on the Treasury's fiscal 2022 budget proposal that the Biden administration is hoping to get the Group of 20 (G-20) finance ministers' endorsement for "the core elements" of its international corporate tax proposals at a meeting next month in Venice, including a global minimum corporate tax.

She said the Treasury was working towards an agreement at the G-20 meeting that is similar to the Group of Seven wealthy democracies' endorsement of the US proposal for a 15 per cent corporate minimum tax and a new method of local-market taxation for the largest and most profitable multinational corporations.

Her comments on the G-20 meeting followed a Reuters report on Tuesday that a draft communique being circulated ahead of the July 9-10 gathering indicated the finance leaders would endorse a global minimum tax, although it made no reference to a specific rate.

The Biden administration is seeking a global minimum tax of at least 15 per cent.

Dr Yellen also sparred with Republican senators over inflation concerns, sticking to her line that recent spikes in inflation data reflect transitory phenomena, including "supply bottlenecks" in the economy.

She added that most measures of inflation expectations remained well anchored, with those exceeding a year out are stable, at around the Federal Reserve's 2 per cent target.

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