Republican House Speaker Kevin McCarthy and Mitch McConnell, the Senate minority leader, met with Biden and top Democratic leaders at the White House in the latest round of a power struggle threatening massive consequences for the world’s largest economy.
Biden said he made one thing clear during the talks: “Default is not an option.”
While McCarthy said he “didn’t see any new movement,” he, McConnell, Democratic Senate Majority Leader Chuck Schumer, House Minority Leader Hakeem Jeffries and Biden would meet again Friday.
The lifting of the so-called debt ceiling — a limit on government borrowing to pay for bills already incurred — is often routine.
But budget-minded Republicans, who won control of the House of Representatives in the 2022 midterm elections, have vowed to only raise the limit from its current $31.4 trillion maximum if spending curbs are enacted.
After the White House talks, Jeffries said that “extreme” Republicans “have indicated that they are willing to take us down the path of default.”
Schumer added that by not taking default off the table, McCarthy was “greatly endangering America.”
A similar impasse in 2011 resulted in the United States losing the coveted AAA debt rating. Biden has warned of dire consequences this time too.
Treasury Secretary Janet Yellen has said that unless Congress acts in the coming weeks, “financial and economic chaos would ensue.”
Yellen has also had conversations with CEOs to discuss the dangers of brinkmanship, a source familiar with the matter confirmed to AFP.
Asia trip on the line
While McConnell said “the United States is not going to default,” he stressed that “we are running out of time.”
Biden indicated that he might call off his upcoming trip to Asia for Group of Seven meetings, adding that while he is “still committed” to attending, the debt ceiling talks are crucial.
He conceded it was “possible” that he would not make the trip, telling reporters: “If somehow we got down to the wire and still haven’t resolved this… I would not go.”
McCarthy maintained that House Republicans were doing their jobs by passing a plan that raises the borrowing limit, while instituting major government spending cuts. Democrats call that plan the “Default on America Act.”
Both sides have accused each other of taking the country “hostage.”
Biden has repeatedly called for a “clean” lifting of the US borrowing limit, arguing that the deficit spending has already been approved by Congress and is therefore not up for debate.
The Senate is bracing for a clash, as 43 Republicans in the Democratic-controlled chamber pledged over the weekend to impose legislative hurdles to any attempt to raise the debt ceiling “without substantive spending and budget reforms.”
It remains unclear when the government will run out of funds, but the Treasury has warned it could happen as early as June 1.
In addition to triggering Wall Street turmoil, failure to address the debt limit impasse may also impact Biden politically as he forges ahead into a re-election campaign.
Uncertainties ahead
Should the United States be unable to meet all its obligations, the Treasury would likely prioritize debt and interest payments, analysts say.
That could mean delays in doling out funds to politically sensitive groups, such as Social Security beneficiaries or Medicare providers.
Financial markets would also be rattled by the uncertainty.
In a recent report, Moody’s Analytics projected that the most likely date the Treasury Department will exhaust its accounting measures is June 8, signaling “precious little time” to reach agreement.
This date means Treasury payments will likely be disrupted for a few days “until a mid-June surge of tax payments materializes” and helps with revenue flows.
But markets are sure to react negatively, with the subsequent selloff on Wall Street likely to catalyze action on Capitol Hill.
“We think lawmakers will try to negotiate a compromised bill first if they are still at a stalemate when the debt limit is at risk of being breached, which seems likely,” Nancy Vanden Houten of Oxford Economics said Tuesday.
She earlier told AFP that “risks are certainly elevated compared to prior debt limit standoffs.”