US debt ceiling deadline pushed back as talks continue

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US Treasury Secretary Janet Yellen said the government could run out of money to pay all of its bills on June 5, giving lawmakers a few more days of flexibility to strike a deal that would avoid an unprecedented default.

Yellen’s new estimate, released on Friday afternoon, came as the White House and House Republicans raced to finalize a pact on government spending that would pave the way for lifting the U.S. borrowing limit and remove a huge cloud of uncertainty hanging over the country’s economy.

Previously Yellen warned that a default could occur as early as June 1. The latest update means there’s a bit more wiggle room for the final details of the deal to be hammered out.

“Based on the most recent data available, we now estimate that the Treasury will not have sufficient resources to meet the government’s obligations if Congress does not raise or suspend the debt ceiling by the 5 June,” Yellen wrote in a letter to Kevin McCarthyPresident of the Republican House.

In the letter, Yellen said the Treasury would be able to make $130 billion in payments related to pensions and government health care for the elderly in the first two days of June, but these “will leave the Treasury with an extremely low level of resources”. In the week of June 5, she added, “the Treasury’s projected resources would be insufficient to meet” its obligations.

Negotiators for President Joe Biden and McCarthy met again on Friday, after come closer to an agreement this 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.

Biden told reporters he was optimistic about the possibility of a deal. “Hopefully we will know by tonight if we can get a deal done,” he said.

But there was still no certainty that a compromise could be found. “Every time there’s more progress, the issues that remain get tougher and tougher,” Patrick McHenry, chairman of the House Financial Services Committee and one of the House’s top negotiators, told reporters. Republicans. “At some point, this thing can come together — or go the other way.”

He added that it could still take “a day or two or three” for an agreement to be reached.

McCarthy had adopted a more optimistic tone when he arrived at the Capitol earlier in the morning.

“I’m going to work as hard as I can to try to get there, make more progress today and complete the journey. I’m a total optimist,” he said. “It really comes down to one thing: it’s about spending. The Democrats have never wanted to stop the amount of spending.

In an interview with CNN earlier, Wally Adeyemo, the deputy treasury secretary, suggested a deal was within reach: “What I can say is that we are making progress and our goal is to ensure we get an agreement as the defect is unacceptable. ”

He added: “The president said it, and the president said it. And we have to do something before the beginning of June when the secretary said that it is very likely that we will no longer have the resources to pay our bills.

On Friday, IMF Managing Director Kristalina Georgieva warned that if no deal was reached, the United States would enter “uncharted territory” and would have to “reduce” spending.

Georgieva said failure to meet the deadline would affect confidence in Treasury Markets and the risk of “pulling up the anchor” by ensuring the stability of the global financial system.

“We have all read the fairy tale about Cinderella – Cinderella due to leave the ball at exactly midnight,” she said. “And we are at this stage. So before our carriage turns into a pumpkin, could we please settle this? »

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 Democratic-controlled Senate, before it is signed into law by Biden.

The vote in the very divided House will be particularly delicate because the base Republican and Democratic lawmakers expressed displeasure 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 programs, legislation to speed up approvals for large investments, and a smaller increase. funding for the Internal Revenue Service to audit wealthy taxpayers.

A deal, if passed successfully, would remove a major source of risk for the U.S. economy and financial markets, which are grappling with turmoil in the banking sector and the impact of rising interest rates for tame inflation.

Negotiations to resolve the budget crisis have 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 drew closer, it was still uncertain whether it could be finalized by the end of Friday, meaning talks could spill over into the long Memorial Day weekend in the United States.

Following reports of progress in debt ceiling talks, US stocks rose, with the S&P 500 closing up 1.3%. Treasury yields rose, mostly in response to stronger than expected economic data released in the morning.

Additional reporting by Peter Wells in New York