Debt default risks ‘worldwide panic’, warns US Treasury Secretary

The US Treasury Secretary, Janet Yellen, has issued a stark warning that the clock is ticking to prevent an economic disaster due to the failure to increase the US debt ceiling.

This warning comes as President Joe Biden is set to discuss the deadlock with congressional leaders.

Yellen alerted that the deadlock’s ramifications are already evident, referring to the stalemate between President Biden and Speaker Kevin McCarthy over the decision to elevate the government’s $31.4 trillion (£25.1 trillion) borrowing cap that has persisted since January.

A tweet from President Biden indicated that a default could result in the loss of eight million jobs, stressing that “default is not an option.” Similarly, McCarthy voiced his concern stating, “we only have so many days left to deal with this” before his meeting with Biden.

A US default, where the country fails to meet its debt obligations, could potentially set off a market downturn, inflate borrowing costs, and deal a significant blow to the global economy, possibly mirroring the 2008 financial crash.

Yellen highlighted that the deadlock has already added to the debt burden of American taxpayers and cautioned that investors are growing more hesitant to hold government debt due for maturity in early June.

Addressing community bankers, Yellen explained that potential disruptions to federal government operations such as air traffic control, law enforcement, border security, national defense, and telecommunication systems would further compound the unprecedented economic and financial crisis.

She further warned that the ensuing financial crisis could intensify the economic downturn and potentially result in a breakdown of numerous financial markets, inciting global panic, margin calls, runs, and fire sales.

This warning comes as recent data indicates a lower-than-expected rise of 0.4% in US retail sales in April, falling short of the economists’ forecast of 0.8%.

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