US Treasury Secretary Janet Yellen said on Saturday that a showdown over raising the US debt ceiling would be “more difficult” than in the past, but she remained optimistic that a solution could be found to avoid a first-ever US default.

Yellen told Reuters on the sidelines of a Group of Seven finance ministers conference in Japan that she planned to update the US Congress within the next few weeks on when the Treasury will run out of funds to pay the government’s debts.

The US Treasury Secretary has repeatedly urged Congress to agree to lift the $31.4 trillion cap on federal borrowing in order to avoid the “economic and financial catastrophe” that would result if the US defaulted on its debts.

The deadlock, according to British Finance Minister Jeremy Hunt, poses a “very serious” threat to the world economy.

“It would be absolutely devastating if America… was to have its GDP knocked off track by not reaching agreement,” Hunt said on the sidelines of the G7 meetings.

Yellen said last week that her projection that the Treasury might not be able to satisfy payment obligations as early as June 1 was consistent with the Congressional Budget Office’s analysis on Friday, which warned of a “significant risk” of default in the first two weeks of June.

President Joe Biden, a Democrat, maintains that Congress has a constitutional obligation to extend the debt ceiling without conditions in order to fulfil already approved spending. Republicans, who control the House, want Biden to agree to drastic budget cutbacks in order to secure their consent.

Unlike most developed countries, the United States has a borrowing limit. Because the government spends more than it collects, politicians must raise the cap on a regular basis.

Yellen stated that the first big confrontation over the debt ceiling since 2011 indicated the continued polarisation in the United States following Donald Trump’s administration.

“It’s certainly not a positive for relationships and standing in the world and credibility,” she said. “Maybe this time is more difficult, but I’m hopeful that…we will find a solution.”

She said it was a good indicator that “pretty much everyone” at Biden’s meeting with House leaders on Tuesday agreed that a default would be unacceptable.

Yellen said Biden, who is slated to reassemble the group early next week, still considered attending the G7 summit in Hiroshima, which begins on Friday, as a priority, though she highlighted that he had stated he may postpone the trip if there was insufficient progress on ending the impasse.

Despite the debt ceiling battle, Yellen said she was still persuaded that the Biden administration had re-established US leadership in the globe, and that other G7 leaders were grateful that they had “turned the dial 180 degrees relative to the Trump administration.”

She said there were no appropriate choices for prioritising payments in the case of a default, but admitted it was technically conceivable to process them one day at a time as revenue came in, resulting in a continuous default. Payments for principal and interest are handled separately.

The Bipartisan Policy Centre reported this week that during the 2011 crisis, some Treasury officials saw the strategy as the most realistic and least destructive.

“We shouldn’t be talking about that,” Yellen said. “We should be talking about raising the debt ceiling. Every plan has serious downsides.”

(Adapted from USNews.com)

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