Berliner Boersenzeitung - Biden-McCarthy debt talks to resume after new default warning

The Treasury has warned of "catastrophic" economic consequences if the US runs out of cash to pay its bills, which would leave it unable to pay federal workers and trigger a likely surge in interest rates with knock-on effects for businesses and mortgage holders across the country -- and financial markets around the world.

Fresh data reinforces the prospect of default "potentially as early as June 1," Treasury Secretary Janet Yellen warned on Monday in a letter to House speaker Kevin McCarthy.

The two parties remain sharply divided on the issue, with Republicans insisting Biden agree to significant spending cuts in exchange for their support to raise the debt ceiling.

Democrats have been calling for a "clean" increase of the borrowing limit with no strings attached, and have accused Republicans of using extreme tactics to push their political agenda ahead of the so-called "X-date" at which the US starts defaulting on its debts.

The nonpartisan Congressional Budget Office forecasts that the X-date could be reached by June 15.

- Breaking the stalemate -

Little progress was made in the first round of talks between Biden and congressional leaders last week, with both sides blaming each other for the stalemate.

A second round of talks scheduled for Friday was postponed, giving House, Senate and White House negotiators time to meet over the weekend in a bid to make progress, US media reported.

On Monday, McCarthy said Democrats were still not taking the debt talks seriously.

"I still think we're far apart," he told reporters in the US Capitol, adding "it doesn't seem to me yet that they want a deal."

Republicans, who regained control of the House in the 2022 midterm elections, are using their newfound political clout to demand deep cuts of roughly $130 billion from federal agencies and programs in exchange for their support for lifting the debt ceiling. This would limit spending in the 2024 fiscal year to 2022 levels.

They also want to expedite domestic energy production projects, simplify the process for obtaining permits for pipelines and refineries, claw back unspent Covid relief funding and impose work requirements for social programs.

Biden has rebuffed many of these proposals, accusing Republicans of "holding the economy hostage" to further their political objectives.

- Little time remaining -

There are now only three days remaining when the House and Senate are both in session before June 1, when the Treasury predicts the US could run out of money.

Some senators have acknowledged that they may have to cancel the Memorial Day recess beginning Thursday to get a deal finalized, although there is no official plan to do so.

In recent days, Biden has suggested he may be forced to postpone a planned trip to Asia this week if the two sides fail to reach agreement, but has stopped short of canceling his visit while the talks continue.

As the X-date draws closer, Democrats in Congress have begun considering a range of alternatives, including using an arcane congressional procedure to bypass McCarthy.

They've also contemplated asking Biden to invoke the 14th Amendment to raise the debt ceiling unilaterally, which some legal scholars believe would allow the Treasury to simply ignore the debt limit.

But Biden has cautioned that such a move could be challenged in court, and has instead continued to call on Republicans to support a clean increase to the debt ceiling.

A US default would likely cause a recession, which would be "catastrophic," Deputy Treasury Secretary Wally Adeyemo told CNN over the weekend.

"The United States of America has never defaulted on its debt -- and we can't," he said.

(F.Schuster--BBZ)