U.S. taking ‘extraordinary measures’ to avoid default as debt ceiling hit

The countdown to a possible US government default is now on, and friction between President Joe Biden and House Republicans is raising alarm over whether the United States can avoid a potential economic crisis.

The Treasury Department on Thursday said in a letter to congressional leaders that it had begun “extraordinary measures” because the government had been fighting the US$38.381 trillion authorized borrowing capacity. An artificially imposed cap, the debt ceiling has increased approximately 80 times since the 1960s.

The market has so far remained calm, as the government can rely on accounting tweaks to keep the economy open and the economic threat is months away. Even many analysts are concerned that there will be a deal.

But this particular moment seems more difficult than past brushes with the debt limit because of the differences between Biden and new House Speaker Kevin McCarthy, who is the chairman of the restive Republican caucus.

These differences increase the risk that governments may fail to meet their obligations for political reasons. This could have rocked financial markets and plunged the world’s largest economy into a preventable recession.

Biden and McCarthy, a Republican from California, have months to reach an agreement as the Treasury Department imposes “extraordinary measures” to keep the government operating until at least June. But years of escalating partisan animosity have led to conflicting demands that jeopardize lawmakers’ ability to work together on basic tasks.

Biden insisted on a “clean” increase in the debt limit so that existing financial commitments could be met and refused to start negotiations with Republicans. McCarthy called for negotiations that he believed would lead to spending cuts. It’s unclear how much he wants to cut and whether Republicans will support any deal after the start of a new Congress that requires 15 rounds of voting to elect McCarthy as Speaker.

Asked twice on Wednesday if there was evidence that House Republicans could ensure that the government would prevent default, White House press secretary Karine Jean-Pierre said it was a “constitutional responsibility” to protect the full faith and credit of the United States. He did not say the White House sees any signs at this stage that defaults are off the table.

“We will not discuss this,” Jean-Pierre said. “They should feel responsible.”

McCarthy said Biden needs to understand the political reality of a divided government. The speaker linked the debt ceiling to the credit card limit and called for a level of fiscal restraint that did not occur under President Donald Trump, a Republican who in 2019 signed a bipartisan suspension of the debt ceiling.

“Why make a crisis about it?” McCarthy said this week. “I mean, we have a Republican House, a Democratic Senate. We have a president there. I think it’s arrogant to say, ‘Oh, we’re not going to negotiate on anything’ and especially when it comes to funding.”

Any deal must pass the Democratic-led Senate. Many Democratic lawmakers are skeptical about their ability to work with Republicans to align with the “Make America Great Again” movement started by Trump. The MAGA movement claimed that the 2020 election that Trump lost was rigged, a falsehood that led to the January 6, 2021 uprising at the US Capitol.

“There is no political brinkmanship with the debt limit,” Senate Majority Leader Chuck Schumer said. “It is reckless for Speaker McCarthy and MAGA Republicans to try and use the full faith and credit of the United States as a political bargaining chip.”

‘Extraordinary measures’ were taken

To keep the government open, the Treasury Department on Thursday made a series of accounting maneuvers that will hold back contributions and investment redemptions for government workers’ pension and health care funds, giving the government enough financial space to handle its day-to-day operations. – daily fees until about June.

What happens if these measures are exhausted without a debt limit deal is unknown. Prolonged defaults could be devastating, with markets crashing and layoffs fueled by panic if confidence evaporates in corners of the global economy, the US Treasury notes.

Analysts at Bank of America warned in a report last week that “there is a high degree of uncertainty about the speed and magnitude of the damage that will be done to the US economy.”

The basic challenge is that governments have to balance their books every day if they don’t have the ability to issue debt. If the government can’t pay off the debt, it would have to impose annual cuts equal to 5 percent of the total U.S. economy. Analysts say the base case is that the US avoids default.

However, if past debt ceiling fights such as the one that took place in 2011 are any guide, Washington may be in a state of nervousness as it is suspended animation with little progress until “date X”, the deadline when the Treasury’s “extraordinary measures” are implemented . expire.

Unlike its 2011 counterpart, the Federal Reserve is actively raising interest rates to lower inflation and unwind its own U.S. debt, meaning recession fears have risen among consumers, businesses and investors.

Biden administration officials have said they will not prioritize payments to bondholders if the country passes “date X” without an agreement. For years, officials have studied this emergency option, which Treasury officials across the administration say is impossible because of the government’s payment system.

“For some, ‘extraordinary measures’ are a back-up plan, and once exhausted, the next step is a major question mark,” economists at Wells Fargo said in an analysis Thursday.