Yellen says debt default would hurt U.S. international leadership

Treasury Secretary Janet Yellen said failure to avoid a looming federal government default would undermine Washington's ability to provide international leadership and defend U.S. national security.

Yellen has long warned a default could cause an "economic and financial catastrophe." She added the new wrinkles Thursday while in Japan to attend a meeting of Group of Seven finance officials.

A default "would spark a global downturn" and "would also risk undermining U.S. global economic leadership and raise questions about our ability to defend our national security interests," Yellen said during a press conference preceding the G-7 gathering. 

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Janet Yellen
Andrew Harrer/Bloomberg

President Joe Biden and Republican lawmakers made little progress in a meeting earlier this week in Washington that kicked off negotiations on the topic. Republican aides and White House staff planned to begin budget discussions in its wake, with another meeting set for Friday between Biden and congressional leaders. 

Asked by reporters if there were a long-term fix to the recurring debt-ceiling issue, Yellen suggested it would be better for the U.S. legislature to permanently do away with setting a cap on government borrowing that is independent of its own budget decisions.

"Personally, I think we should find a different system for deciding on fiscal policy," she said. "Congress could repeal a debt ceiling or handle it differently."

She said lawmakers could also decide to retain the limit, but change the rules around it — essentially requiring a supermajority in Congress to block the president from unilaterally raising the ceiling.

Biden and congressional Republicans are locked in a showdown over raising the $31.4 trillion borrowing limit, with GOP leaders demanding promises of future spending cuts before they approve a higher ceiling. Biden has insisted on a "clean" increase, with budget talks kept separate.

The U.S. government reached the statutory cap on borrowing in January and the Treasury has since been using special accounting measures to make cash available. Yellen has told Congress those measures could run out as soon as June 1, putting payments to U.S. bond investors, benefits recipients and federal contractors, among others, in jeopardy.

— With assistance from Joe Mayes

Bloomberg News
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