Yellen warns US could default soon after Dec. 15

Treasury Secretary Janet Yellen told congressional leaders Tuesday that the federal government could default on its debt soon after Dec. 15 without action to raise the federal borrowing limit.

In a Tuesday letter, Yellen said she has “a high degree of confidence” in Treasury’s ability to keep the U.S. current on debt payments until midway through next month — roughly two weeks longer than her initial projection of Dec. 3.

She warned, however, that the U.S. could run out of cash soon after transferring $118 billion to the Highway Trust Fund to comply with the recently signed bipartisan infrastructure bill.

The infrastructure bill signed Monday by Biden orders Yellen to transfer the highway funds one month after the measure’s enactment, which is Dec. 15. Yellen said the Treasury may exhaust its ability to keep the U.S. solvent within days of moving those funds.

“There are scenarios in which Treasury would be left with insufficient remaining resources to continue to finance the operations of the U.S. government beyond this date,” Yellen wrote. 

“As the federal government’s cash flow is subject to unavoidable variability, I will continue to update Congress as more information becomes available,” she added.

As Yellen urged lawmakers to raise or suspend the debt ceiling as soon as possible, the announcement of a later “X Date” may give Congress more time to chart a path to avoid a potential catastrophe.

Biden in October signed a bill to raise the federal debt limit by $480 billion days before the U.S. was on track to default Oct. 18. The measure, passed with only Democratic votes after GOP senators reluctantly broke a filibuster, was intended to keep the U.S. from defaulting on its debt through Dec. 3 — the date funding for the federal government expires.

While dozens of brief government shutdowns have had little impact on the broader economy, the U.S. has never defaulted on its debt and could derail the global economy if it misses a payment. Foreign governments, financial institutions and investors hold trillions of dollars in U.S. debt issued through Treasury bonds that could be irredeemable if the U.S. cannot pay its bills.

The resulting financial shock could seize global financial markets and likely cause a domestic recession. 

Even so, Republicans have vowed to block any Democratic attempt to raise the federal debt limit despite doing so three times under former President Trump with bipartisan support. While GOP lawmakers have tied their refusal to Democratic spending plans, raising the debt ceiling is essential to paying off decades of previous expenses and has no direct impact on future spending levels.

Democrats could raise the debt ceiling by a specific amount through a budget reconciliation resolution, which requires only simple majorities to pass in each chamber. Budget experts say the process could take two weeks but could involve untold amendment votes that could open up Democrats to future political and legislative headaches.

Democratic leaders resisted raising the debt ceiling through reconciliation even as the impending default neared in October, saying it would set an irresponsible precedent. Even so, they may be forced to keep the country solvent through reconciliation if Senate Minority Leader Mitch McConnell (R-Ky.) refuses to back down from his pledge to block a debt ceiling hike.

Updated at 6:15 p.m.