US Treasury secretary Janet Yellen has said the government could run out of money to pay all its bills on June 5, giving Joe Biden’s administration and lawmakers a few more days of flexibility to strike a deal that would avert an unprecedented debt default.
Yellen’s new estimate, released on Friday afternoon, came as the White House and House Republicans hurried to finalise a pact on government spending that would pave the way to lift the US borrowing limit and remove a huge cloud of uncertainty hanging over the country’s economy.
Before leaving for Camp David on Friday evening, Biden told reporters that he was optimistic about the potential for an imminent agreement. “I’m hopeful we’ll know by tonight whether we are going to be able to have a deal,” he said. By Saturday morning, however, a deal was still elusive.
Previously Yellen had warned a default could occur as early as June 1. The latest update means there is a little bit of additional breathing room for the final details of the agreement to be worked out.
“Based on the most recent available data, we now estimate that Treasury will have insufficient resources to satisfy the government’s obligations if Congress has not raised or suspended the debt limit by June 5,” Yellen wrote in a letter to Kevin McCarthy, the Republican House speaker.
In the letter, Yellen said the Treasury would be able to make $130bn of payments related to pensions and government healthcare for seniors in the first two days of June, but these “will leave Treasury with an extremely low level of resources”. By the week of June 5, she added, “Treasury’s projected resources would be inadequate to satisfy” its obligations.
Negotiators for President Joe Biden and McCarthy met through the night Friday, after moving closer to a deal that would increase the borrowing limit for two years, until after the 2024 general election, while setting caps that would curb spending growth over the same period.
But even as they exchanged versions of legislative text, suggesting they were in the final stages of the talks, there was still no certainty that a compromise could be struck. “Each time there’s more progress the issues that remain become more difficult and more challenging,” Patrick McHenry, the chair of the House Financial Services Committee and one of the House Republican’s leading negotiators, told reporters. “At some point this thing can come together — or go the other way.”
He added it could still take “a day or two or three” for a deal to be reached.
McCarthy had struck a more upbeat tone as he arrived at the Capitol earlier in the morning.
“I’m going to work as hard as we can to try to get this done, get more progress today and finish the journey. I’m a total optimist,” he said. “It’s really coming down to one thing: this has been about spending. Democrats have never wanted to stop the amount of spending.”
In a CNN interview earlier, Wally Adeyemo, the deputy Treasury secretary, suggested a deal was at hand: “What I can say is that we’re making progress and our goal is to make sure that we get a deal because default is unacceptable.”
He added: “The president has said it, and the Speaker has said it. And we have to get something done before early June when the secretary has said that it’s highly likely that we will no longer have the resources to pay our bills.”
IMF managing director Kristalina Georgieva on Friday warned that if no deal was reached, the US would enter “uncharted territory” and face having to “trim down” spending.
Georgieva said breaching the deadline would affect confidence in Treasury markets and risk “pulling the anchor” providing stability to the global financial system.
“We all have read the fairy tale about Cinderella — Cinderella having to leave the ball exactly at midnight,” she said. “And we’re at this point. So before our carriage turns into a pumpkin, could we please get this sorted?”
Once a deal is reached, it could take several days for any legislation to be approved by the Republican-controlled House of Representatives and the Democrat-controlled Senate, before it is enacted into law by Biden.
The vote in the closely divided House will be particularly tricky because rank-and-file Republican and Democratic lawmakers have expressed dissatisfaction with the emerging deal.
In addition to setting spending caps for the next two years, the possible compromise will also likely involve new work requirements for some social safety net programmes, legislation to speed up permitting for big investments and a smaller funding boost for the Internal Revenue Service to audit wealthy taxpayers.
An agreement, if successfully enacted, would remove a big source of risk for the US economy and financial markets, which are grappling with turmoil in the banking sector and the impact of higher interest rates to tame inflation.
Negotiations to solve the fiscal crisis only kicked into high gear in recent weeks, forcing Biden to cut short a trip to Asia in order to follow the talks directly in Washington. Even though a deal was moving closer, it was still not certain that it could be finalised by the end of Friday, meaning the talks might spill over into the Memorial day long weekend in the US.
In the wake of reports of progress in debt-ceiling talks, US stocks rose, with the S&P 500 closing 1.3 per cent higher. Treasury yields rose, mostly in response to stronger than expected economic data released in the morning.
Additional reporting by Peter Wells in New York