US Debt Ceiling and Potential Treasury Default
When the U.S. government reaches its debt limit, the legal cap on how much the U.S. can borrow, it can’t borrow any more money to pay off its debts, potentially forcing a default. The GOP, which recently regained control of the House, refuses to raise the limit without substantial cuts to social programs.
A US default could cause serious damage to the global financial system, which relies on US Treasuries as a safe investment. Markets fell on the possibility of the nation defaulting on its obligations, including paying interest on treasury bills, potentially triggering a global financial crisis. Concerns abound about the liquidity of the Treasury market, which needs to attract a lot of money to roll over maturing debt.
Treasury Secretary Yellen said the Treasury has begun employing extraordinary measures that should prevent a technical default until early June while it waits for Congress to raise the debt ceiling. The department is changing investments in two government-run funds for retirees, which will give the Treasury the flexibility to continue making federal payments while it is unable to increase the overall level of debt.
“How long the extraordinary measures may last is subject to considerable uncertainty,” Yellen wrote in a letter to congressional leaders. Still, “cash and extraordinary measures are unlikely to run out before early June,” she said. The US Treasury announced that it plans to borrow $932 billion in the first quarter, $353 billion more than expected. The Treasury plans to borrow $278 billion in the second quarter.
The Treasury is expected to run out of cash around August if the debt ceiling is not raised, but in order to avoid defaulting on US debt, the Treasury would ‘prioritise’ payments on his obligations if he could no longer borrow funds to cover all his expenses. Bondholders who hold US Treasury debt would be the first to receive interest and other payments, even if it meant delaying other obligations like government salaries or retirement benefits.
