NIIGATA, Japan, May 11 (Reuters) – U.S. Treasury Secretary Janet Yellen on Thursday urged Congress to raise the $31.4 trillion federal debt limit and avoid an unprecedented bankruptcy that sparked a global economic downturn. and risk undermining US global economic leadership.
Yellen delivered the latest in a series of increasingly sharp warnings in remarks prepared for a press conference ahead of a meeting in Japan with her counterparts from the Group of Seven (G7) wealthy countries, as well as India, Indonesia and Brazil.
“Bankruptcy would threaten the profits we have worked so hard for over the past few years during our recovery from the pandemic. And it would cause a global downturn that would set us back much further,” she said. “It would also risk undermining US global economic leadership and raise questions about our ability to defend our national security interests.”
US President Joe Biden said on Wednesday that Congress’s failure to act before the Treasury runs out of money to pay the government’s bills — something that could happen as early as June 1 — would push the US economy into recession. can deposit.
Yellen said the Republican gaffe on the issue amounts to a “crisis of our own making” and that the mere threat of bankruptcy could lead to a downgrade of the US government’s credit rating, as happened during a battle against the debt ceiling in 2011.
It could raise interest rates on mortgages, car payments and credit cards, Yellen said, noting that rates already spiked on debt around June 1.
The US economy would take a “substantial” hit if the Treasury Department was no longer able to issue debt, not to mention the impact on financial markets and institutions and consumer confidence, she said, citing the prospect “unthinkable”.
“All of these analyzes show that we would be in a very substantial downturn — if this lasted for a meaningful period of time,” she said.
Biden, a Democrat, insists 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 spending cuts.
The US president said this week he may have to skip to Hiroshima to meet with G7 leaders next week, depending on how the debt ceiling deadlock develops. Biden will meet again with key Democratic and Republican congressional leaders on Friday after an initial meeting on Tuesday.
Unlike most developed countries, the US sets a ceiling on how much it can borrow. Because the government spends more than it takes in, legislators must raise that limit periodically.
Yellen also outlined her priorities for the G7 meeting, including individual and collective action to strengthen the global economy and curb inflation, doubling down on her commitment to help Ukraine defend itself against Russian invasion, and efforts to longer term to enhance economic resilience.
Despite the downside risks, Yellen said the global economy is in a better position than many predicted six months ago, with most G7 countries having seen a fall in annual headline inflation and improved growth forecasts.
The United States had taken action to bolster confidence in its banking system following the failure of three regional banks, Yellen said, as well as 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 being too late to implement such schemes.
Yellen said she would also work with her G7 counterparts to build greater economic resilience over 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 from “exclusively extractive industries to activities that better support the domestic economy and employment,” she said.
Yellen said the work would build on the $600 billion in investment being made through the G7 Partnership for Global Infrastructure and Investment, which aims to mobilize private capital for infrastructure projects in developing countries.
The G7 — which groups the US, Japan, Germany, Britain, France, Italy and Canada along with the European Union — would also continue to work to mitigate geostrategic risks and counter economic coercion from China, Yellen said.
Reporting by Andrea Shalal in Niigata; Edited by William Mallard