With the U.S. government reaching a $31.4 trillion borrowing limit on Thursday, Washington is facing the risk of a financial crisis, within months, as Congress heads toward a serious showdown between Republicans who control the House of Representatives and Democrats, headed by President Joe Biden.
Republicans’ threat to reject routine approval to increase the legal borrowing cap could push the world’s largest economy into default.
As the debt ceiling approaches, the US Treasury Department on Thursday began taking measures to avoid defaulting on government debt. It will use techniques and tools in accounting methods to allow the government to continue its functions.
These “extraordinary measures” could help reduce the amount of outstanding debt currently under the $31.4 trillion ceiling.
But the Treasury warned that the available tools would only help for a limited time, likely no more than six months.
Treasury Secretary Janet Yellen urged Congress in a letter Thursday to congressional leaders, including the speaker of the House of Representatives Kevin McCarthy “to act quickly to protect the reputation and credibility of the United States.”
Far-right Republicans who control the party’s slim majority in the House of Representatives are demanding that President Joe Biden approve cuts in government spending.
They argue that there is a need to limit borrowing, which Congress approves to increase each year to raise the so-called debt ceiling.
But the White House said such cuts would affect key programs such as Social Security and military spending or could warrant large new taxes.
Chuck Schumer, the Democratic majority leader in the Senate, said in a statement: “Brinkmanship with debt reduction would be a massive blow to local economies and American families and would be no less than an economic crisis at the hands of Republicans.”
Read: The US is reaching its debt ceiling. One can predict what’s coming
Heads of companies and at least one credit rating agency have warned that a prolonged standoff between the two sides could shake markets and destabilize an already shaky global economy.
JPMorgan Chase Chief Executive Jamie Dimon warned that a default would damage US credibility, adding: “We should not question the creditworthiness of the U.S. government.”
In an interview with CNBC, he said: “This is sacred. It should never happen.”
Concerns at Davos
It was only natural that the issue of a possible Washington default would move to Davos.
Finance and technology executives who gathered at the World Economic Forum this week expressed optimism about the economy in 2023 — but there is at least one major risk looming for markets, they said.
On the sidelines of the conference, the CEO of a Wall Street bank told CNBC: “I don’t think anybody knows what will happen if they really go further than what happened in 2011. That’s why it’s scary.”
The CEO, who asked not to be identified while speaking candidly, said he had just met with a group of US lawmakers worried about the upcoming impasse.
“It will affect markets and will be a drag on economic activity due to uncertainty. It’s going to be really bad for us.”
Salesforce CEO Marc Benioff said Wednesday that tackling the debt ceiling “will be difficult.”
The situation is “chaotic” with at least one possible solution: Congress could pass the “clean debt border,” according to Peter Orzag, the chief financial advisory officer at Lazar.
But reaching a deal to increase the U.S. debt limit will not be easy in a political environment that has grown more polarized in the past decade.
For more on the global economy, click here.