Yellen warns US Congress of cash supply running out around Oct 18

WASHINGTON (BLOOMBERG) – Treasury Secretary Janet Yellen warned that her department will effectively run out of cash around Oct 18 unless Congress suspends or increases the federal debt limit, putting pressure on lawmakers to avert a default on US obligations.

“Treasury is likely to exhaust its extraordinary measures if Congress has not acted to raise or suspend the debt limit by Oct 18,” Yellen said in a letter on Tuesday (Sept 28) to congressional leaders.

Yellen said separately at a Senate hearing on Tuesday that “catastrophic” results would follow a failure to address the debt limit, including a “financial crisis” and recession.

Yellen’s latest timeline is somewhat sooner than many on Wall Street anticipated, and her warning intensified signs of financial market concern amid an impasse between Republicans and Democrats on addressing the debt ceiling.

Yields on Treasury bills maturing around Oct 18 rose more than those on other securities. A broader selloff in Treasuries contributed to the biggest slump in equities since May.

House Speaker Nancy Pelosi said that her chamber could vote as soon as Tuesday on a new debt-ceiling measure, after Republicans blocked a debt limit suspension in the Senate on Monday as part of a package that included stopgap funding for the government.

Such a move would be largely symbolic as Senate GOP leader Mitch McConnell reiterated Tuesday that he’s “made it perfectly clear” Republicans wouldn’t back a debt-limit increase given the pending tax and social spending package of up to US$3.5 trillion (S$4.7 trillion) that Democrats are pursuing on their own.

Political posturing

Further political posturing is likely in coming days, as Republicans attempt to force Democrats to boost the debt limit on their own and Democrats seek to pressure at least 10 GOP senators they would need to defeat a filibuster. Historically, votes address the debt limit have been bipartisan.

House Majority Leader Steny Hoyer said Democrats “may have to use reconciliation” to address the debt ceiling, referring to the legislative mechanism that would bypass the filibuster and remove the need for GOP votes.

“Reconciliation is one option and that’s on the table.”

By contrast, Dick Durbin, the No. 2 Democrat in the Senate, said that would take too long.

“That is a nonstarter. Using reconciliation is a nonstarter,” he said.

The cumbersome parliamentary requirements of the reconciliation measure means Democrats would need to start it soon in order to finish before Oct 18. Meantime, Democrats may again seek to force Republicans into backing an increase.

“The closer to the deadline the process starts, the more likely it is that Republicans would agree to waive some of the required time for debate,” Alec Phillips, an analyst at Goldman Sachs Group, wrote in a note on Tuesday.

“If so, Democratic leaders seem incentivised to let the clock run down before acting.”

Pelosi told reporters on Tuesday, “We have to pass the debt limit.”

She underscored, “It’s about paying past bills,” highlighting the point that the need to boost the debt ceiling reflects past fiscal policy decisions enacted by members of both parties.

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Speaking on the Senate floor on Tuesday morning, Majority Leader Chuck Schumer gave no indication of a clear path forward. He said he will seek approval of all senators later on Tuesday to lower the threshold from 60 votes to a simple majority to suspend the debt limit – though Republicans are sure to object. At the same time, he continued to insist Democrats won’t allow a default or a closure of the government.

Republican campaign

Republican lawmakers have used the debt-limit debate to help them portray Biden’s proposed fiscal expansion – spanning expanded child tax credits, paid family leave and new benefits for Medicare recipients – as out-of-control government spending. An eventual Democrat-only vote to raise the debt limit would provide fodder for election attack ads.

Meantime, Congress also faces a deadline for enacting a stopgap spending bill to keep the federal government funded past the start of the new fiscal year on Oct 1. The Bill Republicans blocked on Monday included both funding to keep the government running until early December and a debt-ceiling suspension until December 2022.

“Sometime today” Democrats will make the determination on “what the best strategy is to move it forward and get it done,” Hoyer said of the continuing resolution that will be needed to keep the government open and avert a shutdown.

Democrats on Tuesday discussed ways to change the debt ceiling in the future, Pelosi said. Those included minting a US$1 trillion dollar coin or giving the Treasury the power to raise the ceiling on its own.

Blake Gwinn, head of US rates strategy for RBC Capital Markets, said he doesn’t expect any broad market impact from the debt-limit fight beyond Treasury debt maturing in close to the default deadline, unless the country gets “within a few days” of default or a major credit rating company downgrades the US debt rating, as occurred in 2011.

“Because we’ve been through this before, I think people will still expect a deal to come together until the very last minute,” Gwinn said.

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During the debt limit battles of 2011 and 2013 investors grew worried as default neared. In 2011, yields on effected Treasury bills began to surge about eight days ahead of default and in 2013 about 20 days beforehand. Stocks tumbled in the aftermath of the 2011 sovereign downgrade by S&P Global Ratings.

Cost of debt standoffs

The debt standoffs also have direct costs to taxpayers because of the higher interest rates investors demand because of the payment uncertainty.

Delays in raising the debt limit in 2011 forced the government to pay US$1.3 billion in additional borrowing costs that year, not including any impact on the Treasury’s costs in later years, according to a US General Accountability Office assessment the following year. Democrats can raise the debt ceiling on their own through the reconciliation process, which bypasses the filibuster in the Senate.

The most likely scenario would have Democrats revise an already-passed budget resolution that set the stage for an economic package of as much as US$3.5 trillion, creating separate legislation to raise the debt ceiling.

The process would involve two lengthy Senate debates and “vote-a-ramas,” where scores of amendments could be offered. Once the Senate is finished, the House would have to clear the amended budget resolution and the debt-cap hike. Other Democratic lawmakers have stopped short of ruling out the go-it-alone strategy.

Yellen’s new estimated timeline – an update from the “some time” in October she had previously advised – suggests Democrats will need to get started on the reconciliation process within days if they opt to pursue that solution.

“While this is our best estimate, the federal government’s cash flows are subject to unavoidable variability,” Yellen said in her letter to Pelosi, Schumer, McConnell, House minority leader Kevin McCarthy and other top lawmakers.

“This uncertainty underscores the critical importance of not waiting to raise or suspend the debt limit.”

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