Debt ceiling worries deepen as early June US default reinforced

The deadlock in Washington over raising the US government’s $31.4 trillion borrowing limit adds to global economic concerns as a new impartial congressional report calls a “significant risk” of historic bankruptcy in the first two weeks of June.

The US Congressional Budget Office report, released Friday morning, confirms Treasury Secretary Janet Yellen’s earlier warnings that bankruptcy could come as early as June 1.

“There is a great risk that the government will no longer be able to meet all its obligations sometime in the first two weeks of June,” the CBO warned.

The congressional budget scorer also noted that federal debt payments “will remain uncertain in May, even if the Treasury eventually runs out of money in early June.”

President Joe Biden and his Democratic colleagues in Congress have been pushing for swift action since the beginning of the year to raise the $31.4 trillion legal cap on unconditional government loans.

Republicans, who closely monitor the House of Representatives, want new limits on future spending set before they green-light more payments to cover loans for previously determined spending.

Speaking at a meeting of Group of Seven (G7) financial officials in Japan, World Bank President David Malpass said the looming risk of bankruptcy, which would be the first in U.S. history, exacerbates the problems facing facing the slowing global economy.

“It is clear that the distress in the world’s largest economy would be negative for everyone,” Malpass told Reuters on the sidelines of the G7 meeting.

Next week, Biden will attend a G7 leadership meeting in Niigata, Japan, but said this week he could cancel his trip if he and congressional leaders don’t make enough progress toward raising the debt limit.

White House spokeswoman Karine Jean-Pierre told reporters that staff-level talks, which began Tuesday, were “productive,” though she declined to give details.

“They will meet today, they will meet on the weekend. I think that should kind of tell you that the talks are moving in the right direction,” she added.

A meeting between Biden and Democratic and Republican congressional leaders tentatively scheduled for Friday was postponed to sometime early next week as both sides negotiate what spending could be cut in the 2024 budget.

Gloomy view

The standoff began to show its effects beyond Washington. On Friday, the University of Michigan reported that its bimonthly survey of consumer confidence showed that households have the gloomiest outlook on the economy in six months, thanks in no small part to the confrontation with the debt ceiling.

“Expectations for the economy for the year ahead are down 23 percent from last month,” research director Joanne Hsu said in a statement.

Wall Street is also concerned about a possible bankruptcy. US equities fell after sentiment data showed households more concerned about the situation, while yields on government bonds maturing in the first half of June remain significantly high compared to debt maturing later.

As legislative staff toiled behind closed doors, lawmakers blamed each other for the unrest.

“MAGA House Republicans threaten to default on US debt unless we give in to their demands,” Biden said in a tweet Friday, referring to former President Donald Trump’s Make America Great Again movement. Biden warned Republicans could cut funding for thousands of jobs, including National Park rangers and firefighters.

“Mr. President, stop lying,” Republican Representative Anthony D’Esposito tweeted back to Biden, claiming that the president refused to negotiate with the Republicans in good faith.

Biden and his cabinet have repeatedly said a default would be catastrophic. US bonds are the foundation of the global financial system, and a default could shake global markets and trigger a recession, they warn.

Yellen urged Wall Street leaders and business owners to speak out about how the debt limit battle was affecting economies and creating “a great deal of uncertainty,” she told Bloomberg TV on the sidelines of Japan’s G7 meetings . She also said she remained optimistic that the debt cap issue would be resolved.

Yellen plans to discuss the current deadlock with leading bankers next week. A senior Treasury official told Reuters she would do so with board members of the Bank Policy Institute lobby group.

As the battle continues in Washington, a House Democrat came up with an idea that could capture the attention of lawmakers.

Democratic Representative Abigail Spanberger said members of the US Congress should withhold their salaries until the debt limit issue is resolved.