© Reuters. U.S. Treasury Secretary Janet Yellen testifies before the Senate Appropriations Subcommittee on Financial Services about the FY22 Treasury budget request on Capitol Hill, in Washington, DC, U.S., June 23, 2021. Shawn Thew/Pool via REUTERS
By David Lawder
WASHINGTON (Reuters) -U.S. Treasury Secretary Janet Yellen on Wednesday warned Congress that the United States risks a debt default and a new financial crisis as soon as the August recess if lawmakers fail to act quickly to suspend or raise the federal borrowing limit.
In testimony to a Senate Appropriations subcommittee, Yellen said defaulting on U.S. debt obligations would be “unthinkable” and “would have absolutely catastrophic economic consequences.”
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.
An unprecedented default on U.S. 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,” 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 to allow the government to continue borrowing, Yellen said it was difficult to estimate that because spending on COVID-19 relief programs has added more uncertainty to Treasury’s payment flows.
“We can’t tolerate any chance of defaulting on the government debt, and there is a lot of uncertainty. It’s possible that we could reach that point while Congress is out in August, and I would really urge prompt action on raising the limit or suspending it,” Yellen said.
According to Senate and House of Representatives legislative calendars, the August recess will run from Aug. 9 to Sept. 10 in the Senate https://www.senate.gov/legislative/2021_schedule.htm and July 30 to Sept. 19 in the House https://www.majorityleader.gov/sites/democraticwhip.house.gov/files/2021CALENDAR-REVISED2.pdf, with committee work scheduled on several days in early September.
If the debt limit prevents Treasury from new borrowing, the government would have to rely only tax receipts to pay obligations, eventually making it impossible to make some debt repayments.
SEEKING G20 ENDORSEMENT
Yellen told the hearing on the Treasury’s fiscal 2022 budget proposal that Biden administration is hoping to the G20 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 G20 meeting that is similar to the G7 wealthy democracies’ endorsement of the U.S. proposal for a 15% corporate minimum tax and a new method of local-market taxation for the largest and most profitable multinational corporations.
Her comments on the G20 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%.
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% target.
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