The US Treasury has begun taking “extraordinary measures” to meet its obligations, after the US government hit its $31.4tn borrowing limit, Janet Yellen said in a letter to congressional leaders on Thursday as she urged lawmakers to raise the debt ceiling sooner rather than later to avoid an unprecedented default.
The Treasury secretary had previously warned that the US government would run up against the debt ceiling — the country’s legal borrowing limit — on Thursday. Yellen sent the letter confirming the breach to Republican Speaker of the House Kevin McCarthy and Democratic House minority leader Hakeem Jeffries on Thursday morning.
Yellen cautioned that there was “considerable uncertainty” surrounding how long the “extraordinary measures” could continue before the US government risked default.
“I respectfully urge Congress to act promptly to protect the full faith and credit of the United States,” she said.
The Treasury secretary has previously said it is “unlikely” that the government would run out of cash before “early June”, but there is a range of estimates about when the US will run up against the possibility of default. The timing of the cliff-edge depends on a range of factors, including incoming tax receipts.
Yellen’s letter fires the starting gun on a legislative battle that is expected to go on for months given that Congress is divided, with Republicans controlling the House of Representatives and Democrats holding on to the Senate. Republicans control the House by a razor-thin margin, giving a minority of conservative members the ability to block legislation.
Several Republican rebels flexed their muscles during McCarthy’s election this month as Speaker of the House, insisting that the debt ceiling should only be raised if Democrats make concessions to cut federal spending over the next decade. The White House has so far said it is not open to negotiating the matter, accusing Republicans of risking a disastrous default.
In order to create additional borrowing capacity, Yellen on Thursday said the Treasury would cease investments into the Civil Service Retirement and Disability Fund as well as the Postal Service Retiree Health Benefits Fund. Both funds will be “made whole” after a debt deal has been reached, and federal workers and retirees will be “unaffected by these actions”, she added.
Once these extraordinary measures are exhausted, the Treasury may be forced to resort to other tactics, including prioritising interest and principal payments on the government’s debt over other outlays, like social security and military pay.
Such a process would be costly, experts at the Bipartisan Policy Center have warned, entailing “sorting and choosing from hundreds of millions of monthly payments, stretching the limits of the Treasury Department’s financial technology systems and forcing executive branch officials to pick winners and losers.”