Biden warns states, cities of fallout from looming US debt default

A failure to extend the debt limit could plunge the US economy into a recession.
A failure to extend the debt limit could plunge the US economy into a recession.PHOTO: REUTERS

WASHINGTON (BLOOMBERG) - The White House is warning state and local governments about the risk of a default on US debt, as it urges Congress to raise or suspend the federal borrowing ceiling and avoid a crisis.

“If the US defaults on its obligations, the ripple effects will hurt cities and states across the country,” the White House said in a letter to state and local governments, released on Friday (Sept 17). “If the US defaults and can no longer pay its obligations, billions of dollars in state aid and state-run but federal funded programmes could be halted.”

The letter comes after Senate Minority Leader Mitch McConnell this week rejected an appeal by Treasury Secretary Janet Yellen for Republicans to join with Democrats in raising the federal debt ceiling, leaving the two sides at odds, with potentially just weeks to go until the limit is breached.

Disaster relief payments, Medicaid and the children’s health insurance programme, as well as funding for education, infrastructure and child nutrition could be disrupted, according to the letter. The debt limit snapped back into place at the beginning of August, but the Treasury has been using so-called extraordinary measures since then to avoid a default. Ms Yellen has warned that those measures will run out some time in October.

“If the US defaults on its debt – cities and states could experience a double-whammy: falling revenues and no federal aid as long as Congress refuses to raise or suspend the debt limit,” the White House warned, adding that a debt limit crisis could also raise the cost of borrowing for states and municipalities. 

The administration has been urging Congress to simply raise or suspend the limit, as has been done regularly in the past, though Republicans have seized on the issue as a way to combat President Joe Biden’s domestic fiscal agenda, which includes tax increases for corporations and a series of proposed spending measures that the GOP opposes.

National Economic Council director Brian Deese said on Friday that the administration ultimately expects Congress to avoid a debt limit crisis. 

“We have seen this done in a bipartisan way consistently and the best way to do this is without a lot of drama, without a lot of self-inflicted harm to the economy and to our country, and that’s what we’re going to do,” Mr Deese told MSNBC. “Now, there’s a lot of posturing on this issue, but we’re confident at the end of the day, we’ll get this done.”

The US Conference of Mayors on Friday urged Congress to act on a bipartisan basis. 

“Both parties in Washington have added to our debt, and both parties have an obligation to make sure the United States can continue to pay its bills,” Dayton, Ohio Mayor Nan Whaley, the group’s president, said in a statement.

“This is one of the most basic responsibilities of Congress, and there is no good reason for lawmakers to create a crisis that undermines the full faith and credit of the United States.”