On May 16th, U.S. Treasury Secretary Janet Yellen raised concerns about the potential ramifications of a government debt default. She warned that millions of Americans could lose their income and many businesses could be destroyed if the U.S. defaults on its debt. Yellen emphasized that such a default could cause a recession.
Regional bank officials share this view and fear that disruptions to federal operations could exacerbate the economic and financial crisis. The resulting financial crisis could double the severity of the economic downturn.
Without a debt ceiling hike, the U.S. government will only have until June 1st to pay its bills. Thus, pressure is mounting on Congress and White House Republicans to reach a deal immediately. Yellen stressed that failure to reach an agreement would have serious economic and financial consequences that could negatively affect millions of Americans.
If a debt ceiling hike is not agreed upon, Yellen warned that there is a highly probable chance that many financial markets will collapse. This could trigger margin calls and mass runs, leading to significant sell-offs.
Yellen called on Congress to act immediately and avoid the same brinkmanship that led to the first ever U.S. credit rating downgrade in 2011. The longer Congress delays, the more significant the economic costs will be.
President Biden is scheduled to meet with House Speaker McCarthy and three other congressional leaders to discuss a plan to avoid the U.S.’s first ever default. Yellen emphasized that allowing the U.S. to default on its debt would harm the country’s reputation and undermine its global economic leadership.
Despite concerns about a potential government debt default, Yellen provided a positive assessment of the health of U.S. regional banks. While some banks have experienced aftershocks due to the pandemic, there are no signs of a fundamental change in the health of the banking system. The Treasury Department remains vigilant and is ready to take further action if smaller financial institutions confirm a run on contagious deposits.