WASHINGTON — Wednesday was a big day in the credit markets. Mid-November is when interest payments are made on many Treasury securities, and the government owed $25 billion in interest on Treasury bills, notes and bonds.
The trouble was that the government didn't have the $25 billion. And it couldn't borrow it. Congress had limited government debt to $4.9 trillion, and the government reached that limit Wednesday. President Clinton last week vetoed a bill to raise the debt ceiling because he objected to other provisions of the bill.
So Treasury Secretary Robert E. Rubin resorted to his authority under a 10-year-old law to dip into two trust funds for civil service employee pensions.
"This is no way for a great nation to manage its financial affairs," Rubin admitted. But the alternative, he said, was unthinkable: Default.
Rubin did not simply withdraw $25 billion from the two trust funds. Rather, the 10-year-old law authorized him to convert interest-bearing securities in the trust funds to non-interest-bearing IOUs. Using this authority, Rubin converted $29 billion in trust fund assets to IOUs. That had the effect of reducing the national debt by $29 billion. That in turn gave the Treasury the maneuvering room it needed to borrow the money it needed Wednesday (with $4 billion left over).
Treasury will need about $3 billion of that today to cover another $3 billion in interest payments and other obligations that he could otherwise not meet.
Sooner or later, the government will have to make good on its $29 billion worth of IOUs to the pension funds. According to law, it will have to pay the funds back with interest. (If Treasury had simply been able to borrow the $29 billion the usual way, it would also have had to pay interest, and so the maneuver executed by Rubin on Wednesday imposed no substantial new cost on the government.)
Congress, in the debt ceiling extension that Clinton vetoed last week, would have repealed the Treasury secretary's authority to use the two civil service pension funds this way. In fact, this is the chief reason Clinton rejected the legislation.
The Treasury Department estimated that its actions will leave the government afloat until late December. If the debt ceiling has not been lifted by then, Rubin will have to go through Wednesday's exercise all over again.
Altogether, the two trust funds hold about $371 billion. That is enough to cover about two years' worth of budget deficits--in case Congress does not extend the government's borrowing authority during that period.