Yellen pleads with Congress to raise debt ceiling, avoid ‘unthinkable’ default

Treasury Secretary Janet Yellen implored lawmakers Wednesday to suspend the legal limit on how much debt the U.S. can owe before it kicks back in on Aug. 1, warning that failure to do so would be “unthinkable” and “have absolutely catastrophic economic consequences.”

In testimony before a Senate subcommittee, Yellen urged Congress to make sure the U.S. does not default on its debt by raising and suspending the so-called debt ceiling. A two-year deal to suspend the debt limit expires after July 31, at which point the Treasury Department would have to take “extraordinary measures” to prevent the U.S. from defaulting.

“I believe it would precipitate a financial crisis. It would threaten the jobs and savings of Americans and at a time when we’re still recovering from the COVID pandemic,” Yellen said of a default on the U.S. debt.

“I would plead with Congress simply to protect the full faith and credit of the United States by acting to raise or suspend the debt limit as soon as possible.”

Yellen’s plea comes as Republican lawmakers warn that they will not support a suspension of the debt ceiling unless President Biden and Democrats agree to cut spending or take other debt reduction measures. Senate GOP leaders told The Hill last week that they don’t expect enough Republicans in the upper chamber to support a clean debt ceiling increase to avert a filibuster.

Democrats and Republicans have squared off over the debt ceiling several times over the past decade and briefly allowed the U.S. to surpass it during the Trump administration. Yellen warned Wednesday, however, that the economic impact of COVID-19 has limited Treasury’s ability to know how long it can avert a default.

“We can’t tolerate any chance of defaulting on the government debt, and there is a lot of uncertainty. It’s possible that we could reach that point,” Yellen said, adding that Treasury could exhaust extraordinary measures in the middle of the August congressional recess.

If the U.S. defaults on its debt, trillion of dollars in Treasury bonds held by foreign governments and investors could go from nearly as safe as cash to potentially irredeemable. Experts warn that such an occurrence could trigger a global financial crisis given how much of the world’s commerce is underpinned by the U.S. dollar.

Even so, the White House has expressed confidence that Biden and Congress will be able to reach a deal to raise the debt limit.

“The president believes that Congress will do what they’ve done three times during the Trump administration, which is to raise the debt ceiling,” White House press secretary Jen Psaki said Monday.

“We know that that will be a central focus and discussion, probably even in here, come the fall, but he expects they will do what they’ve done three times [under former President Trump],” she added.

Updated at 3:40 p.m.