US default could trigger recession, disrupt critical government services - Yellen (updated)

First Republic Bank

16/05/2023 14:50

(Recasts with further quotes from speech)
    By Andrea Shalal
       WASHINGTON, May 16 (Reuters) - U.S. Treasury Secretary
Janet Yellen on Tuesday warned that a default on government debt
would likely leave millions of Americans without income
payments, potentially triggering a recession that could destroy
many American jobs and businesses.
    Yellen told a gathering of community bankers that the
unprecedented economic and financial crisis would be exacerbated
by possible disruptions to the federal government’s operations,
including air traffic control, law enforcement, border security
and national defense, and telecommunications systems.
    The accompanying financial crisis could multiply the
severity of the downturn, she said in remarks prepared for
delivery, adding, "It is very conceivable that we'd see a number
of financial markets break - with worldwide panic triggering
margin calls, runs and fire sales."
    Yellen on Monday told Congress the Treasury expects to be
able to pay the U.S. government's bills only through June 1
without a debt limit increase, heaping pressure on Republicans
in Congress and the White House to reach a deal in coming days.
    Failure to reach a deal would result in severe economic and
financial consequences, she said.
    "Our economy would suddenly find itself in an unprecedented
economic and financial storm," she said, adding that 66 million
Social Security beneficiaries and millions of veterans and
military families would likely go unpaid. "And the resulting
income shock could lead to a recession that destroys many
American jobs and businesses," she said.
    Yellen said the standoff over the federal debt limit is
already driving borrowing costs higher and adding to the
country's debt burden, and urged Congress to avoid the
"eleventh-hour brinkmanship" over the debt ceiling in 2011 that
led to the first-ever downgrade of the U.S. credit rating.
    "Time is running out. Every single day that Congress does
not act, we are experiencing increased economic costs that could
slow down the U.S. economy," Yellen said in remarks to the
Independent Community Bankers of America.
    "The U.S. economy hangs in the balance. The livelihoods of
millions of Americans do too. There is no time to waste.
Congress should address the debt limit as soon as possible."
    U.S. President Joe Biden is due to meet at 3 pm. EDT (1900
GMT) on Tuesday with Republican House of Representatives Speaker
McCarthy and the three other top congressional leaders to hash
out a plan to avoid the country's first-ever default.
    Yellen said the 2011 crisis - when lawmakers raised the debt
limit shortly before the government had to stop making payments
- showed the serious repercussions of not acting sooner. 
    Consumer confidence fell by over 20% as a result then, while
the S&P 500 stock index dropped 17%, and mortgage and auto loan
costs went up, she said.
    Allowing the U.S. to default would jeopardize the country's
reputation and undermine the bedrock of U.S. global economic
leadership, she said.
    Investors had already become more reluctant to hold
government debt that matures in early June, and the deadlock was
increasing the overall debt burden, she said.
    Yellen gave an upbeat assessment of the health of U.S.
community banks, noting that many reported higher net income in
2022 than before the pandemic, even as some regional banks were
under increased pressure after the failure of two large regional
banks - Silicon Valley Bank and Signature Bank in March.
    There had been some "aftershocks", including the failure of
First Republic Bank, she said, but she did not see "any sign of
a shift in the fundamental health of the banking system."
    Still, Treasury remained vigilant and was continuing to
closely monitor conditions, she said, adding that the government
was ready to take further actions if needed, including if
smaller institutions saw deposit runs that risked contagion.   

 (Reporting by Andrea Shalal
Editing by Shri Navaratnam and Louise Heavens)
 ((andrea.shalal@tr.com; +1 202-815-7432;))