US Treasury Secretary Janet Yellen said last week that the United States will likely hit the $31.4 trillion statutory debt limit on Jan 19, forcing the Treasury to launch extraordinary cash management measures that can likely prevent default until early June.

“Once the limit is reached, Treasury will need to start taking certain extraordinary measures to prevent the United States from defaulting on its obligations,” Yellen said in a letter to new Republican House of Representatives Speaker Kevin McCarthy and other congressional leaders.

She urged the lawmakers to act quickly to raise the debt ceiling to “protect the full faith and credit of the United States.

“While Treasury is not currently able to provide an estimate of how long extraordinary measures will enable us to continue to pay the governments obligations, it is unlikely that cash and extraordinary measures will be exhausted before early June,” the letter added.

Republicans now in control of the House have threatened to use the debt ceiling as leverage to demand spending cuts from Democrats and the Biden administration

Republicans now in control of the House have threatened to use the debt ceiling as leverage to demand spending cuts from Democrats and the Biden administration. This has raised concerns in Washington and on Wall Street about a bruising fight over the debt ceiling this year that could be at least as disruptive as the protracted battle of 2011, which prompted a brief downgrade of the US credit rating and years of forced domestic and military spending cuts.

The Washington Post reported last week that House Republicans had prepared an emergency plan for breaching the debt limit. The proposal, which was in the preliminary stages of being drafted, would direct the Treasury Department to prioritise certain payments if the US hits the debt ceiling, according to the newspaper.

The White House said on Friday after Yellen’s letter that it will not negotiate over raising the debt ceiling.

“This should be done without conditions,” White House spokesperson Karine Jean-Pierre told reporters. “There’s going to be no negotiation over it.” The proposal from House Republicans reported by the Washington Post would call on the Biden administration to make only the most critical federal payments if the Treasury Department comes up against the statutory limit on what it can legally borrow. The plan will call on the department to keep making interest payments on the debt, the newspaper reported, citing sources.

House Republicans payment prioritisation plan may also stipulate that the Treasury Department should continue making payments on Social Security, Medicare and veterans benefits, as well as funding the military, the newspaper added.

The plan was part of the private deal reached this month to resolve the standoff between right-wing hardliners in the House and conservative McCarthy over the election of House speaker, the Washington Post said.

Yellen’s estimate expressing confidence that the government could pay its bills only through early June without increasing the limit marks a deadline considerably sooner than forecasts by some outside budget analysts that the government would exhaust its cash and borrowing capacity — the so called “X Date” — sometime in the third quarter of calendar 2023.

Analysts have noted that some Treasury bills maturing in the second half of the year are sporting a premium in their yields that may be tied to elevated risk of a default in that window.

“You could read this partly as trying to get Congress to act sooner rather than later,” said Bipartisan Policy Centre economics director Shai Akabas, adding that Treasury was being conservative in its approach.

Yellen said that there was “considerable uncertainty” around the length of time that extraordinary measures could stave off default, due to a variety of factors, including the challenges of forecasting the government’s payments and revenues months into the future.

Pension investments suspended

As of last Wednesday, Treasury data showed that US federal debt stood $78 billion below the limit, with a Treasury operating cash balance of $346.4bn. The department last Thursday reported a $85bn December deficit as revenues eased and outlays grew, particularly for debt interest costs.

Yellen said in her letter that the Treasury this month anticipates suspending new investments in two government retiree funds for pensions and healthcare, as well as suspending reinvestments in the Government Securities Investment Fund, or G Fund, part of a savings plan for federal employees. The retirement investments are restored once the debt ceiling is raised.

“The use of extraordinary measures enables the government to meet its obligations for only a limited amount of time,” Yellen wrote to McCarthy and other congressional leaders.

“It is therefore critical that Congress act in a timely manner to increase or suspend the debt limit. Failure to meet the government obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability,” Yellen wrote.

Published in Dawn, The Business and Finance Weekly, January 16th, 2023