US default on $31.46 trillion debt may lead to global crisis: Treasury chief

U.S. Treasury Secretary Janet Yellen on Thursday urged Congress to raise the $31.4 trillion federal debt limit and avert an unprecedented default that would trigger a global economic downturn and risk undermining U.S. global economic leadership.

Yellen issued the latest in a series of increasingly stark warnings in remarks prepared for a press conference ahead of a meeting in Japan with her counterparts from the Group of Seven (G7) rich nations, as well as India, Indonesia and Brazil.

“A default would threaten the gains that we’ve worked so hard to make over the past few years in our pandemic recovery. And it would spark a global downturn that would set us back much further,” she said. “It would also risk undermining U.S. global economic leadership and raise questions about our ability to defend our national security interests.”

U.S. President Joe Biden on Wednesday said failure by Congress to act before Treasury runs out of money to pay the government’s bills — something that could happen as early as June 1 — risked throwing the U.S. economy into a recession.

Yellen said Republican brinkmanship on the issue amounted to a “crisis of our own making” and that just the threat of a default could lead to a downgrade of the U.S. government’s credit rating, as occurred during a debt ceiling fight in 2011.

It could drive interest rates higher on mortgages, auto payments and credit cards, Yellen said, noting that rates were already spiking on debt due around June 1.

The U.S. economy would suffer a “substantial” hit if Treasury was no longer able to issue debt, not to mention the impact on financial markets and institutions and consumer confidence, she said, calling the prospect “unthinkable.”

“All of these analyses show that we would fall into — if this lasted for any meaningful period of time — a very substantial downturn,” she said.

Biden, a Democrat, insists that Congress has a constitutional duty to raise the debt ceiling, which reflects previously spent federal money, without conditions. But Republicans who control the House of Representatives have tied any increase in the debt limit to sweeping budget cuts.

The U.S. president this week said he might have to skip travelling to Hiroshima to meet with G7 leaders next week, depending on developments in the debt ceiling standoff. Biden is due to meet with top Democratic and Republican congressional leaders again on Friday after an initial meeting on Tuesday.

Unlike most developed countries, the U.S. sets a ceiling on how much it can borrow. Because the government spends more than it takes in, lawmakers must periodically raise that cap.

Yellen also mapped out her priorities for the G7 meeting, including individual and joint action to strengthen the global economy and bring down inflation, redoubling a commitment to help Ukraine defend itself against Russia’s invasion, and longer-term efforts to boost economic resilience.

Despite the downside risks, Yellen said the global economy remained in a better place than many had predicted six months ago, with most G7 countries having seen a drop in annual headline inflation and improved growth forecasts.

The United States had taken action to strengthen confidence in its banking system after the failure of three regional banks, Yellen said, as well as enacting legislation to invest in infrastructure, alternative energy and semiconductor chips.

It was also critical to help developing countries, she said, adding that G7 members would coordinate their efforts to push for “timely and comprehensive” debt treatments for countries in debt distress. Yellen has repeatedly accused China – the world’s largest sovereign creditor – of dragging its heels on moving forward with such arrangements.

Yellen said she would also work with her G7 counterparts to build greater economic resilience in the longer term by boosting domestic production of critical goods and helping developing countries expand their stake in global supply chains.

That meant helping those countries move away from “solely extractive industries into activities that provide greater support for the domestic economy and employment”, she said.

Yellen said the work would build on the $600 billion in investments underway through the G7 Partnership for Global Infrastructure and Investment, which aims to mobilise private capital for infrastructure projects in developing countries.

The G7 — which groups the U.S., Japan, Germany, Britain, France, Italy and Canada, along with the European Union — would also keep working to mitigate geostrategic risks and counter economic coercion by China, Yellen said.