Treasury Will Take ‘Extraordinary Measures’ To Prevent Government Default—Here’s What That Means

Topline

The federal government could reach its $31.4 trillion borrowing cap as soon as Thursday, Treasury Secretary Janet Yellen warned last week, as she prepares to take “extraordinary measures” to stave off a default, while Republicans and the White House remain at an impasse regarding a deal on raising the debt limit.

Key Facts

Key Background

To prevent a default, the Republican-controlled House and Democrat-controlled Senate will need to agree on a bill raising the debt ceiling and giving the government permission to borrow before the Treasury reaches its “X-date.” Fears of a debt limit showdown grew earlier this month, when far-right Republicans in the House proved they are willing to take extreme measures to convince leadership to give in to their demands. McCarthy was elected after 15 rounds of voting–the first time in 163 years the election has surpassed 11 rounds–and only after giving into major concessions demanded by a group of 20 right-wing lawmakers, some of which affect the debt ceiling negotiations. Among them is a provision that requires Congress to hold an individual vote on raising the borrowing cap, rather than passing it as part of a budget resolution. The deal also included a promise from McCarthy that Congress would not agree to raise the debt ceiling without significant spending cuts. It’s unclear what, exactly, those cuts would entail, but some Republicans have floated raising the age for Medicare and Social Security eligibility in an effort to reduce the federal deficit.

Tangent

The federal government has never actually defaulted on its debt, and Congress has raised the borrowing cap 60 times since 1978 to avoid the scenario, which would be catastrophic to financial markets and have a detrimental impact on the economy by eroding confidence in normally-safe U.S. government debt. A default would also leave the government—which has run annual deficits for decades and relies on borrowing to stay open—unable to pay a large portion of its bills, threatening a range of federal programs.

Surprising Fact

Yellen most recently deployed “extraordinary measures” in 2021 to stave off a default, before Congress raised the cap by $2.5 trillion in December that year. But coming too close to the “X-Date” has consequences. In 2011, Republicans, who had just reclaimed control of the House in January that year, demanded deficit reductions from former President Barack Obama’s administration in exchange for raising the debt ceiling. Congress came to an agreement two days before the Treasury estimated it would reach its borrowing cap, but default fears resulted in the first-ever downgrade of the US credit rating, causing stock prices to plunge.

Contra

The White House has said it will refuse to negotiate on raising the debt ceiling, and has begun to court moderate Republicans who could join Democrats in voting to raise the cap without any conditions, Politico reported.

Further Reading

Debt Limit Showdown: How The Upcoming Negotiations Could Play Out In Congress (Forbes)

U.S. Could Run Out Of Cash By Early June If Debt Limit Isn’t Raised, Yellen Warns (Forbes)

Debt Limit Showdown And Government Shutdown Pose Greatest Risk In A Decade—Here’s What To Expect (Forbes)