On Saturday, Treasury Secretary Janet Yellen called a battle over extending the U.S. debt ceiling “more difficult” but said she was hopeful a solution could be found to avoid a first-ever U.S. default.

Yellen told Reuters on the sidelines of a Group of Seven financial officials conference in Japan that she intended to inform Congress within two weeks of when the Treasury will run out of funds to pay the government’s bills.
The U.S. Treasury director has repeatedly urged Congress to lift the $31.4 trillion cap on federal borrowing to avoid the “economic and financial catastrophe” of a default.

British finance minister Jeremy Hunt told reporters the deadlock was “very serious” for the global economy.

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

Yellen said her projection last week that the Treasury may be unable to satisfy payment obligations as early as June 1 was consistent with Friday’s Congressional Budget Office analysis predicting a “significant risk” of default in the first two weeks of June.

Democratic President Joe Biden claims Congress must raise the cap to fund already approved spending. But, to secure their agreement, House Republicans want Biden to accept severe budget cutbacks.

The U.S. limits borrowing, unlike most wealthy nations. Lawmakers must regularly boost that threshold because the government spends more than it earns.

Yellen said the first big debt ceiling confrontation since 2011 showed U.S. polarization under Trump.

“It’s certainly not a positive for relationships, 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 was encouraged that “pretty much everyone” at Biden’s Tuesday meeting with House leaders agreed that a U.S. default would be unacceptable.

Yellen said Biden, who is set to reassemble the group early next week, still considered attending the G7 conference on Friday in Hiroshima a priority. However, he said he could postpone the trip if the deadlock were unresolved.

Despite the debt ceiling dispute, Yellen said she believed the Biden administration had restored U.S. leadership and that G7 nations were grateful they had turned “the dial 180 degrees relative to the Trump administration”.

She said there were no acceptable ways to prioritize payments in default. Still, it would be technically conceivable to process them one day at a time as revenue came in, creating a rolling default. For example, interest and principal are paid separately.

This week, the Bipartisan Policy Center reported that Treasury officials considered the strategy the most realistic and least destructive during the 2011 impasse.

“We shouldn’t be talking about that,” Yellen remarked. “Raise the debt ceiling.” But, of course, every scheme has major drawbacks.”