US Could Default as Soon as June 1, Yellen Warns

US Could Default as Soon as June 1, Yellen Warns

By Yuval Rosenberg and Michael Rainey
Monday, May 1, 2023

Happy Monday! The deadline for raising the debt limit may be just weeks away, but we have some movement toward talks: President Joe Biden reportedly reached out to congressional leaders Monday to set up a meeting. Biden also marked National Small Business Week with an event at the White House, where he sought to reassure the public that taxpayers will not be on the hook for the failure of First Republic Bank.

Here’s what you need to know about the debt limit developments.

Biden Invites McCarthy to Meet as Yellen Warns on Debt Ceiling Deadline

President Biden called House Speaker Kevin McCarthy and other congressional leaders on Monday to propose a meeting on May 9 to discuss the debt limit, according to Punchbowl News and other reports. The House is out this week and McCarthy is in Jerusalem, where he became the second U.S. speaker (after Newt Gingrich in 1998) to deliver remarks to Israel’s legislature, the Knesset.

“President Biden will stress that Congress must take action to avoid default without conditions, and invited the four leaders to the White House to discuss the urgency of preventing default, as well as how to initiate a separate process to address the budget and fiscal year 2024 appropriations,” a White House official told Punchbowl.

US could run out of cash by June 1, Yellen says: Biden’s calls to the “Big Four” — McCarthy, House Minority Leader Hakeem Jeffries, Senate Majority Leader Chuck Schumer and Senate Minority Leader Mitch McConnell — come as Treasury Secretary Janet Yellen warned Congress Monday that the U.S. could lack sufficient funds to pay its bills as soon as June 1, moving up a deadline that many analysts expected to hit later in the summer.

In a letter to congressional leaders, Yellen noted that her previous estimate of when the Treasury would run out of cash, provided to lawmakers at the beginning of the year, stated that it was unlikely that the deadline would be reached before June 5. But the Treasury’s latest analysis of tax revenues indicates “that we will be unable to continue to satisfy all of the government's obligations by early June, and potentially as early as June 1, if Congress does not raise or suspend the debt limit before that time.”

The U.S. hit the $31.4 trillion debt limit in January, forcing the Treasury to resort to what it calls extraordinary measures to meet its obligations. Those measures now include suspending the issuance of State and Local Government Series Treasury securities, Yellen said, a move that is “not without costs” for state and local governments.

Yellen reminded lawmakers that it is “impossible to predict with certainty the exact date when Treasury will be unable to pay the government's bills,” adding that the deadline could arrive “a number of weeks” later than June 1.

Given the inherent uncertainty of day-to-day revenue and payment flows, Yellen called on lawmakers to move swiftly. “We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States,” she wrote. “I respectfully urge Congress to protect the full faith and credit of the United States by acting as soon as possible.”

CBO concurs: Congressional Budget Office Director Phillip L. Swagel said Monday that smaller-than-expected tax receipts in April have increased the likelihood that the U.S. will run out of funds in early June. Additionally, improved efficiency at the IRS means that the tax agency is processing returns more quickly, leaving fewer payments to be made available in the weeks after Tax Day.

“As a result, we anticipate that the IRS will process relatively few additional payments in May, as it did in the years before the pandemic,” Swagel wrote. “That, in combination with less-than-expected receipts through April, means that the Treasury’s extraordinary measures will be exhausted sooner than we previously projected.”

A very short runway: The new deadline from the Treasury ramps up the pressure on lawmakers to make a deal to raise or suspend the debt limit. The House is currently scheduled to be in session for just 12 days in May, leaving little time to come to an agreement that would head off a potential fiscal and economic catastrophe.

McCarthy and Biden trade barbs: McCarthy, visiting Israel this week as part of a bipartisan delegation to celebrate the 75th anniversary of the country’s independence, had jabbed at Biden earlier in the day over the lack of talks. McCarthy complained that he is in a similar situation to Israeli Prime Minister Benjamin Netanyahu. Biden has pointedly not yet invited Netanyahu for a U.S. visit since the long-time Israeli leader returned to office in December.

“President Biden hasn’t talked to me about the debt ceiling for the last 80 some days or so,” McCarthy told reporters. He called on Biden to negotiate and insisted that, after the House passed a bill last week to raise the federal borrowing cap and cut spending, Republicans will not accept a “clean” increase of the debt limit. “We will not pass the debt ceiling that just raises it without doing something about our debt,” he said.

At a White House event celebrating small businesses and entrepreneurship, Biden again urged McCarthy and Republicans to defuse the threat of default. “America is not a deadbeat nation,” the president said. “We have never, ever failed to meet the debt. Now, as a result, we’re one of the most respected nations in the world. We pay our bills, and we should do so without reckless hostage-taking from some of the MAGA Republicans in Congress.” Biden warned that default would slash funding for critical programs, lead to higher interest rates and hurt workers, the middle class and seniors.

The Senate plans hearings: As Democrats try to sound the alarm on the dangers they see in the GOP’s approach, Senate Majority Leader Chuck Schumer (D-NY) on Monday announced that the Senate will hold hearings on the effects of the House bill starting this week. “This bill was hastily drafted and forced through the House at a break-neck speed,” Schumer wrote in a letter to colleagues, first reported by Punchbowl News. “Not a single Committee of jurisdiction held a hearing or mark-up on a bill that would fundamentally remake American society. The Senate will show the public what this bill truly is.”

Schumer said the hearings will begin Thursday in the Senate Budget Committee.

How the Debt Limit Drama Could Play Out

Even as President Biden and congressional leaders plan to meet next week to discuss the debt limit, the path out of the current stalemate remains unclear. If this is a high-stakes game of chicken, no one is swerving yet — and neither side may budge until the default deadline draws near, bringing with it the risk of economic calamity.

So how might this all play out? Before Biden issued his invitations, Sahil Kapur of NBC News laid out a few possibilities, murky and speculative as they may be.

1. Biden and McCarthy negotiate. The White House still says it won’t negotiate on the debt limit, but many in the media aren’t buying it, arguing it’s not a sustainable position. Even if the two sides can hammer out some sort of agreement, the path to passage would likely require votes from Democrats and some moderate Republicans in the House. A solution won’t be easy to reach or pass given the entrenched positions of both parties and the political risks involved, most notably to McCarthy, who could lose his job if hardline Republicans revolt at the notion of compromise.

Analysts at Goldman Sachs said in a note to clients early Monday that they see a deal happening. “Our base case for resolution of the debt limit is that Congress will raise it on the day of the deadline, plus or minus one day. There is clearly a chance that Congress fails to raise the debt limit by the deadline and some payments are delayed, but if this occurs we would expect a lapse to be brief given the potential political consequences of a longer standoff,” economists Alec Phillips and Tim Krupa wrote. “Ultimately, we expect the debt limit to be resolved through a deal that pushes the next debt limit deadline into 2025 and caps discretionary spending. However, the spending restraint from these caps would likely be more modest than the recent House-passed bill.”

2. Congress passes a clean increase. “GOP senators are doubling down on the push for Biden to negotiate with McCarthy rather than acceding to a clean debt ceiling bill,” Kapur writes. If Biden sticks to his position, some Republicans might start getting antsy, or deadline pressure might force lawmakers to consider a short-term extension, which brings us to...

3. Tie debt limit to government funding: “Some congressional aides believe the way out is to attach a debt limit extension to a bipartisan government funding bill, which is due by Sept. 30 to prevent a shutdown,” Kapur says, adding that the calendar and budgetary considerations could present problems for this scenario. "It may be prudent to pass a short-term debt limit increase to put more time on the clock, show good faith and sync the deadline up with that of government funding,” Republican strategist Liam Donovan tells Kapur. “Short of that sort of orderly engagement, it will take coming right up to the edge to determine who blinks."

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