Today, U.S. Secretary of the Treasury Janet L. Yellen sent a letter to Congressional leaders regarding the debt limit. Read in this article how serious it is that the United States cannot pay its debts.
September 8, 2021, | AtoZ Markets–Today the Secretary of the Treasury, Janet Yellen, has urgently asked the Congress of the United States to take measures seriously and quickly to increase the debt limit so as not to fall into default on its debts.
The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations. Including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.
Janet Yellen had already sent previous letters to Congress, but today’s letter was urgent.
How Serious Is It That the U.S. Cannot Pay Its Debts?
After the debt limit was reinstated on August 1, Treasury began employing certain extraordinary measures to continue to finance the government temporarily.
Janet Yellen has said:
“Once all available measures and cash on hand are fully exhausted, the United States of America would be unable to meet its obligations for the first time in our history. The most likely outcome is that cash and extraordinary measures will be exhausted during the month of October”.
For the world’s leading economy not to have enough cash to pay its debts is a serious matter. Market confidence is severely affected if this is the case.
“A delay that calls into question the federal government’s ability to meet all of its obligations would likely cause irreparable damage to the U.S. economy and global financial markets,” Yellen has said.
In conclusion, the US debt ceiling is the most relevant risk in the short and medium-term for the US sovereign credit rating (AA / Stable Outlook).
However, some analysts have said that in the current political context in Washington, it is expected that Congress will either raise the debt ceiling again or suspend the ceiling once more later in the year, thus avoiding a debt default.
The Debt Limit Is a Headache for the Biden Administration
Since 1969, the US Congress has raised the government debt ceiling 78 times. Permanently, temporarily, or by revising the definition of debt.
The Congressional Budget Office forecasts a federal deficit of $2.3 trillion in 2021, the second-largest since 1945. And $1.3 trillion higher than the U.S. recorded the last time it suspended the debt ceiling.
The Treasury faces increasing pressures to reduce the supply of Treasuries before the next maturity. Any credit event affecting U.S. Treasuries impacts the U.S. and global financial systems. As they are the preferred risk-free global asset and are vital as collateral for interbank liquidity.