US default could trigger recession, disrupt critical government services – Yellen

Reuters | May 16, 2023

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By Andrea Shalal

WASHINGTON (Reuters) – U.S. Treasury Secretary Janet Yellen on Tuesday warned that a default on government debt would likely leave millions of Americans without income payments, potentially triggering a recession that could destroy many American jobs and businesses.

Yellen told a gathering of community bankers that the unprecedented economic and financial crisis would be exacerbated by possible disruptions to the federal government’s operations, including air traffic control, law enforcement, border security and national defense, and telecommunications systems.

The accompanying financial crisis could multiply the severity of the downturn, she said in remarks prepared for delivery, adding, “It is very conceivable that we’d see a number of financial markets break – with worldwide panic triggering margin calls, runs and fire sales.”

Yellen on Monday told Congress the Treasury expects to be able to pay the U.S. government’s bills only through June 1 without a debt limit increase, heaping pressure on Republicans in Congress and the White House to reach a deal in coming days.

Failure to reach a deal would result in severe economic and financial consequences, she said.

“Our economy would suddenly find itself in an unprecedented economic and financial storm,” she said, adding that 66 million Social Security beneficiaries and millions of veterans and military families would likely go unpaid. “And the resulting income shock could lead to a recession that destroys many American jobs and businesses,” she said.

Yellen said the standoff over the federal debt limit is already driving borrowing costs higher and adding to the country’s debt burden, and urged Congress to avoid the “eleventh-hour brinkmanship” over the debt ceiling in 2011 that led to the first-ever downgrade of the U.S. credit rating.

“Time is running out. Every single day that Congress does not act, we are experiencing increased economic costs that could slow down the U.S. economy,” Yellen said in remarks to the Independent Community Bankers of America.

“The U.S. economy hangs in the balance. The livelihoods of millions of Americans do too. There is no time to waste. Congress should address the debt limit as soon as possible.”

U.S. President Joe Biden is due to meet at 3 pm. EDT (1900 GMT) on Tuesday with Republican House of Representatives Speaker McCarthy and the three other top congressional leaders to hash out a plan to avoid the country’s first-ever default.

Yellen said the 2011 crisis – when lawmakers raised the debt limit shortly before the government had to stop making payments – showed the serious repercussions of not acting sooner.

Consumer confidence fell by over 20% as a result then, while the S&P 500 stock index dropped 17%, and mortgage and auto loan costs went up, she said.

Allowing the U.S. to default would jeopardize the country’s reputation and undermine the bedrock of U.S. global economic leadership, she said.

Investors had already become more reluctant to hold government debt that matures in early June, and the deadlock was increasing the overall debt burden, she said.

Yellen gave an upbeat assessment of the health of U.S. community banks, noting that many reported higher net income in 2022 than before the pandemic, even as some regional banks were under increased pressure after the failure of two large regional banks – Silicon Valley Bank and Signature Bank in March.

There had been some “aftershocks”, including the failure of First Republic Bank, she said, but she did not see “any sign of a shift in the fundamental health of the banking system.”

Still, Treasury remained vigilant and was continuing to closely monitor conditions, she said, adding that the government was ready to take further actions if needed, including if smaller institutions saw deposit runs that risked contagion.

(Reporting by Andrea Shalal; Editing by Shri Navaratnam and Louise Heavens)


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