US poised for 'extraordinary measures' as debt limit looms

The US Treasury could start taking "extraordinary measures" Thursday to prevent a default on government debt, as Congress heads towards a high-stakes clash between Democrats and Republicans over raising the borrowing limit.

The measures can help reduce the amount of outstanding debt subject to the limit, currently set at $31.4 trillion, and they would start when the ceiling is breached.

Treasury Secretary Janet Yellen warned in a letter last week that the limit is expected to be reached on Thursday, but the tools would only help for a limited time -- likely not longer than six months.

"It is therefore critical that Congress act in a timely manner to increase or suspend the debt limit," Yellen said to Congressional leadership.

"Failure to meet the government's obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability."

Read also

'Pressing need' for US, China to communicate on economic issues: Yellen

A default would harm US credibility, and JPMorgan Chase Chief Executive Jamie Dimon 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.

'Risky and dangerous'

Republicans have been 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.

Far-right Republicans, who now hold key power in the party's narrow majority in the House, want Democratic President Joe Biden to agree to slash government spending.

They argue that radical cuts are needed to reduce borrowing, which Congress has generally agreed to increase each year -- raising the so-called debt ceiling.

But the White House has said such cuts would have to come from key social security and military spending programs, or involve major new taxes.

Read also

UK inflation slows in December but remains sky-high

The White House also vowed that Biden would not negotiate with hardline Republicans over their "risky and dangerous" opposition to increasing the limit.

'Rancorous politics'

Once the debt limit is hit, the Treasury will start to draw down its cash balances and turn to accounting techniques and tools to allow the government to continue its functions for a period.

The measures the Treasury plans to implement this month are to redeem existing, and suspend new, investments of the Civil Service Retirement and Disability Fund. The same applies to the Postal Service Retiree Health Benefits Fund.

It will also suspend some other reinvestments, temporarily giving leeway to continue financing government operations.

Analysts believe a default is highly unlikely, but point to deeper issues.

"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," Mickey Levy of Berenberg Capital Markets told AFP.

Read also

EU vows to protect European industry to counter US subsidies

But if things stand as they are, spending will keep rising and increasing the debt, he said, adding that a large source of spending goes to entitlement programs such as social security and Medicare.

"The political appetite to really address these programs is just not there," he said.

Source: AFP