Global Financial Crisis Looms as US Risks Defaulting on National Debt

The global financial market may be heading towards an imminent crisis, as the United States is currently facing the risk of defaulting on its national debt in October.

The US Secretary of the Treasury, Janet Yellen, gave the hint on Wednesday while warning congressional leaders that the country was on track to default on the national debt in October if the White House and Congress were unable to raise the debt limit.

In a letter to the congressional leaders, Yellen said the Treasury Department would likely run out of cash and exhaust “extraordinary” measures to keep the federal government within its legal borrowing limit at some point next month.

She stated, “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.

“Given this uncertainty, the Treasury Department is not able to provide a specific estimate of how long the extraordinary measures will last. However, based on our best and most recent information, the most likely outcome is that cash and extraordinary measures will be exhausted during the month of October.”

Yellen addressed the letter to Speaker Nancy Pelosi, House Minority Leader Kevin McCarthy, Senate Majority Leader Charles Schumer, and Senate Minority Leader Mitch McConnell.

The Treasury Department has, reportedly, taken so-called extraordinary measures to prevent the US from defaulting on the national debt since the federal debt limit was re-imposed on August 1.

If the Treasury Department runs out of ways to stave off a default without borrowing more money, the inability of the US to pay its debts could send debilitating shockwaves through the financial system.

Yellen had urged lawmakers for months to raise the debt limit before it was re-imposed in August, warning that a delay could “cause irreparable damage to the US economy and global financial markets.”

She has since pleaded with Congress to give Treasury the ability to pay debts already approved by previous presidents and congressional majorities.

According to her, “Waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States.

“At a time when American families, communities, and businesses are still suffering from the effects of the on-going global pandemic, it would be particularly irresponsible to put the full faith and credit of the United States at risk.”

However, Democrats and Republicans are locked in a stalemate over who bears responsibility for protecting the full faith and credit of the US.

The White House and Democratic leaders are planning to tie a debt limit increase to another must-pass government funding bill, daring Republicans to trigger both a government shutdown and a default by opposing the measure.

“We fully expect Congress to act promptly to suspend the debt limit and protect the full faith and credit of the United States and we expect them to do that in a bipartisan way just as they did three times during the prior administration,” a White House official was quoted to have said on Tuesday.

But Republicans have refused to raise the debt ceiling unless spending cuts and debt reduction programmes are attached.

Democrats could also try to jam a debt ceiling increase into the pending $3.5 trillion infrastructure, climate and social services bill they are attempting to pass through budget reconciliation.

Passing the bill would only require simple majorities in each party, but the package may not be ready for a vote before the US breaches the debt limit.

Yellen had warned for months that the US could default as soon as October, explaining that the economic impact and fiscal response to the coronavirus pandemic makes it hard to determine exactly when.

Peter Uzoho with agency report

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