Janet Yellen warns of ‘substantial market stress’ as US edges closer to debt default

·3 min read
Janet Yellen
Janet Yellen

Janet Yellen has warned of “substantial financial market stress” as the political deadlock over raising of the US debt ceiling continues.

The US Treasury Secretary on Wednesday reiterated her caution that the US could run out of cash as soon as June 1 without a deal.

Ms Yellen told the Wall Street Journal CEO Council summit: “It’s highly likely that we would run out of resources to meet all the government’s obligations in early June and possibly as early as June 1.”

The warning came as talks between Republican lawmakers and the White House on raising the debt ceiling continue to drag on.

President Joe Biden is pushing to raise the national borrowing limit above its current rate of $31.4trn (£25.3trn), but Republicans are resisting.

Without a deal, the US faces the possibility of defaulting on government debt payments as soon as next week.

Stock markets around the world sank on Wednesday and US short-term bond yields jumped.

Ms Yellen said: “Even in the run up to an agreement there can be substantial financial market stress.

“If you go back to 2011, US Treasuries were downgraded. The stock market fell 20pc.”

The S&P 500 sank 1.9pc in New York, while the Nasdaq index was down 1pc.

Yields on US government debt maturing on June 6 topped 6pc as investors demanded a hefty return for holding the debt.

Ms Yellen pointed out that the US paid $20bn in interest payments during the debt showdown in 2011. In that instance, a deal was reached at the 11th hour.

The Treasury Secretary said: “We are committed to not having missed payments and raising the debt ceiling. So that’s not a situation we face. We’re not involved in planning for what happens if there’s a default.”

Republican Speaker of the House Kevin McCarthy - JIM LO SCALZO/Shutterstock
Republican Speaker of the House Kevin McCarthy - JIM LO SCALZO/Shutterstock

Talks between Republican House Speaker Kevin McCarthy and the White House were expected to resume on Wednesday after negotiations ended in impasse on Tuesday.

Republican Representative Garret Graves, one of McCarthy’s chief negotiators, said after talks broke up on Tuesday evening: “Bottom line is that we’re going to have to see some movement or some fundamental change in what they’re doing.

“Right now, we don’t have additional meetings set up.”

Uncertainty in the US hit global stock markets, with the FTSE 100 was down 1.8pc in late afternoon trade in London and other European benchmarks were down over 1pc.

Overnight in Asia, Japan’s benchmark Nikkei 225 index closed down 0.9pc and stocks in Shanghai dropped more than 1pc.

A US default could precipitate a recession, with repercussions around the world.

Jim Reid, a strategist at Deutsche Bank, said: “It's true that both sides are still talking and the mood music sounds (mostly) positive, but we might only be days away from the deadline in early June, and any deal that’s reached is still going to need to be passed through both houses of Congress.

“So there are real concerns that this could go right down to the wire, and investors are slowly gearing up accordingly.”

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