The US Treasury has begun taking measures to prevent a default on government debt, as Congress heads towards a high-stakes clash between Democrats and Republicans over raising the borrowing limit.
Such “extraordinary measures” can help reduce the amount of outstanding debt subject to the limit, currently set at $31.4 trillion, but the Treasury on Thursday warned that the tools would only help for a limited time, likely not longer than six months.
“I respectfully urge Congress to act promptly to protect the full faith and credit of the United States,” said Treasury Secretary Janet Yellen in a letter to Congressional leadership on Thursday.
She added that there is “considerable uncertainty” on how long the measures can last before risking default.
“Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans and global financial stability,” Yellen warned last week.
A default would harm US credibility, and JP Morgan Chase Chief Executive Jamie Dimon also cautioned Thursday that “we should never question the creditworthiness of the United States government.”
“That is sacrosanct. It should never happen,” he said in an interview with CNBC.
The world’s biggest economy could face severe disruption with Republicans threatening to refuse the usual annual rubber stamping of a rise in the legal borrowing limit and this could push the United States into default.
Republicans argue that radical cuts to government spending are needed to reduce borrowing, which Congress has generally agreed to increase each year – raising the so-called debt ceiling.
“Unchecked spending will have dire consequences,” said Republican House Ways and Means Committee Chairman Jason Smith in a statement.
For now, the Treasury Department said it would turn to resources from two funds for retirees as it starts its “extraordinary measures.”
It will not fully invest a portion of the Civil Service Retirement and Disability Fund (CSRDF), with a “debt issuance suspension period” to last until early June.
Treasury will also halt additional investments of amounts credited to the CSRDF and Postal Service Retiree Health Benefits Fund, Yellen said in announcing the latest actions.
As the debt ceiling is reached, Treasury will start to draw down its cash balances and turn to accounting techniques and tools to allow the government to continue its functions, said Mickey Levy of Berenberg Capital Markets.
But he believes the probability of a government default on its debt is close to zero.
“I think ultimately… there will be an agreement to raise the debt ceiling but between now and then, there’s going to be a lot of debate and rancorous politics,” Levy said.