Yellen warns of ‘financial crisis’ if US defaults on debt

The Treasury Department in Washington, DC. US Treasury Secretary Janet Yellen warned Republican and Democrat leaders that the federal government will reach its limit on the amount of money it is able to borrow on 19 January and that further action is needed by lawmakers to prevent economic default. (Photo by Anna Moneymaker / GETTY IMAGES NORTH AMERICA / Getty Images via AFP)

US Treasury Secretary Janet Yellen warned Friday that the United States could see a recession and “cause a global financial crisis” if it defaults on payments, as Congress heads toward a clash over raising the debt limit.

Yellen’s comments to CNN in Senegal come as the US Treasury started taking “extraordinary measures” this week to avert a default as the country reached its $31.4 trillion debt ceiling.

But such tools can only help for a limited time, likely no longer than six months, according to the Treasury.

Yellen noted that the actual day on which the Treasury would no longer be able to use these measures is “quite uncertain,” and could come as early as June.

If the measures were exhausted and Congress fails to raise the debt limit, the US could see a downgrading of its debt “at minimum,” Yellen said.

“If that happened, our borrowing costs would increase, and every American would see that their borrowing costs would increase as well,” she added.

“On top of that, a failure to make payments that are due, whether it’s to bondholders or to social security recipients, or to our military, would undoubtedly cause a recession in the US economy and could cause a global financial crisis,” Yellen said.

This would also undermine the role of the dollar as a reserve currency used in transactions globally.

The world’s biggest economy is bracing for a drawn-out battle in Congress, as Republicans threaten to block the usual annual rubber-stamping of a rise in the debt ceiling.

With new control over the US House after last year’s midterm elections, Republicans want Democratic President Joe Biden to agree to slash government spending, which they view as having risen to unsustainable heights.

But the White House said cuts of the size Republicans demand would have to come from politically sensitive social security and military spending programs, or involve major new taxes.

It added that Biden would not negotiate with hardline Republicans over their “risky and dangerous” opposition to increased borrowing for programs Congress already authorized.

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