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Business Maverick

Yellen warns US paying price as negotiators battle on debt limit

Yellen warns US paying price as negotiators battle on debt limit
Janet Yellen, US Treasury secretary on 14 February 2023. (Photo: Al Drago / Bloomberg via Getty Images)

Treasury Secretary Janet Yellen warned that the US is already paying a price for its failure to raise the federal debt limit, as talks between the White House and legislators from both parties continued into a second week.

“We have already seen Treasury’s borrowing costs increase substantially for securities maturing in early June,” Yellen said in a letter to congressional leaders on Monday. That’s the time period by when the Treasury risks running out of sufficient cash for all federal obligations.

The Treasury released the letter hours after House Speaker Kevin McCarthy said, “We are nowhere near reaching a conclusion” in the talks to raise the debt ceiling. Republicans are insisting on sweeping spending cuts as a condition for the bill. Democrats are proposing other fiscal-tightening steps that the GOP rejects, while insisting that budget measures be kept separate.

McCarthy emphasised that staff-level meetings are “not productive at all”, a day before he’s expected to join other congressional leaders in another meeting with President Joe Biden at the White House. 

Neither McCarthy nor the White House was able to provide a time for the session, which will be the second session for Biden and congressional leaders this month and comes after aides met last week and through the weekend.

Yellen stuck with her warning that the Treasury could run out of cash as soon as 1 June. The department has been deploying special accounting measures since January to stay within the $31.4-trillion statutory ceiling.

“We still estimate that Treasury will likely no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1,” Yellen said in the letter.

There was little immediate reaction in financial markets to the news, which came out after the close of stock trading on Wall Street. Treasury bills maturing in early June continued to trade at a discount to other securities.

Yellen added that she would update Congress again next week as more information becomes available. As of now, the date by when the Treasury will exhaust its special accounting manoeuvres could be “a number of days or weeks later” than early June, she said.

The two sides have been sending mixed signals. Biden said Sunday that he was optimistic a deal could be reached, while McCarthy spent Monday downplaying the odds of success. People familiar with the meetings have said that the White House has pushed to exclude elements of the bill passed by House Republicans last month — including eliminating the president’s program to forgive some student loans, as well as signature legislative accomplishments — from discussions.

Republicans rejected a Democratic proposal that would seek to raise revenue – and decrease future deficits – by altering a dozen provisions of the tax code, including a loophole that allows investors in cryptocurrency to claim losses on assets that they then purchase. Democrats also proposed eliminating a loophole that allows large real estate investors to effectively receive interest-free financing from the government.

Those tax offerings, which were part of Biden’s budget proposal earlier this year, were first reported by the Washington Post. The White House offered to bring Republicans additional proposals but were told that the GOP would not consider any effort to raise taxes, according to the people familiar.

Last week, Representative Dusty Johnson, one of the authors of the House bill, said the GOP has three red lines: no clean debt increase, no tax increase, and the bill must reduce the deficit.

Funding clawback

But the two sides are negotiating around possible spending caps in future years, changes to energy permits and a GOP-led bid to claw back $65-billion in unspent pandemic funds.

A key topic of dispute in the negotiations is expanding work requirements for anti-poverty government benefits, both McCarthy and Biden have said.

“I just don’t see the movement,” McCarthy said. “It seems as though they wanted to have meetings to say they had meetings. Not to really find a solution.”

Biden is scheduled to depart on Wednesday for a trip to Japan, Papua New Guinea, and Australia. White House officials said on Monday that those plans have not changed despite the ongoing debt talks.

Asked whether the president should go abroad at this point, McCarthy said, “I think an American president should focus on the solutions for America. I think it shows your values and priorities.” BM/DM

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