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U.S. hits debt limit and takes actions to postpone a default

The U.S. Treasury's accounting tricks buy 11 weeks for the White House and lawmakers to increase the debt ceiling.

May 16, 2011|By Jim Puzzanghera, Los Angeles Times
  • U.S. Treasury Secretary Timothy F. Geithner on Monday urged lawmakers to take timely action to increase the debt limit in order to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens.
U.S. Treasury Secretary Timothy F. Geithner on Monday urged lawmakers… (Saul Loeb, AFP/Getty Images )

Reporting from Washington — With the federal government hitting its $14.3-trillion debt limit, Treasury officials have started a complex fiscal juggling act to postpone the date when the government can no longer pay its bills.

But those accounting tricks, such as tapping two federal employees pension funds for loans, would buy only 11 more weeks for the White House and lawmakers to increase the debt ceiling.

On Aug. 2, the juggling act would be over, Obama administration officials said.

That would force the U.S., for the first time, to begin defaulting on interest payments owed to holders of government securities and trigger a sort of slow-motion, partial government shutdown in which Washington would stop paying employees, contractors and beneficiaries of Social Security and other programs.

"It's a high-wire act," Rep. Peter Welch (D-Vt.) said of the measures initiated by Treasury Secretary Timothy F. Geithner to postpone the effect of the U.S. reaching its debt limit. "And when he runs out on flexibility and we miss that first payment and the market smashes us, it will be very difficult to put the genie back in the bottle."

President Obama and congressional Republicans are sharply at odds over major spending cuts to reduce the deficit. Republican leaders and a handful of Democrats have demanded such cuts as a condition for raising the debt ceiling, which Congress has never before failed to hike.

Amid the stalemate, the U.S. reached the ceiling Monday after the Treasury issued about $72 billion in securities it had auctioned off last week. With the date looming, Geithner already had started employing "extraordinary measures" to continue to allow the government to borrow.

Those steps include suspending investments in federal pension funds and in a currency exchange rate fund. The moves won't directly affect people yet, though such maneuvers in the past have led to financial costs to taxpayers.

For example, the Government Accountability Office estimated that a seven-day delay in an auction of two-year securities during a debt-ceiling impasse in 2002 caused the Treasury to pay $19 billion in additional interest on them each year.

On May 6, the Treasury stopped issuing special securities used by state and local governments to manage their expenses on tax-exempt bonds. And Monday, Geithner wrote to each member of Congress informing them of two additional measures.

He suspended the issuance of new debt for the Civil Service Retirement and Disability Fund, allowing the Treasury to start cashing in some of the securities held by the fund. Geithner also suspended the daily reinvestment of Treasury securities related to the Federal Employees' Retirement System Thrift Savings Plan.

Both funds will be made whole if the debt limit is increased, and the moves will not affect federal retirees and employees, he said.

"Each of these actions has been taken in the past by my predecessors during previous debt limit impasses," Geithner told lawmakers.

But he urged them to take "timely action to increase the debt limit in order to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens."

The United States has never defaulted on its payments, and Congress has voted to raise the legal limit on federal borrowing 75 times since 1962. Without the ability to continue to borrow, the Treasury would not have enough money to pay the government's bills.

Details of what a default would cause are unclear, the Congressional Research Service said in a report last month. Although the government would not be forced to shut down immediately, there could be delays in services and payments from programs such as Social Security and Medicare.

Faced with the potential that Social Security checks would not be issued in 1996, Congress gave the Treasury special authority to issue securities to continue making payments on time until a debt-ceiling stalemate was resolved.

Wall Street analysts believe the U.S. will raise the debt limit by the Aug. 2 deadline rather than risk a default on securities. A default would sharply raise the interest rates investors would demand in the future.

"The likelihood of an actual default, that Treasury misses an interest payment, we would say is very remote," said Terry Belton, head of fixed-income strategy for JP Morgan Securities Inc. "But if it's not raised by the end of July, the markets would get very jittery then."

Obama and Republicans remain far apart in their deficit-reduction talks.

House Speaker John A. Boehner (R-Ohio) said Monday that "there will be no debt limit increase without serious budget reforms and significant spending cuts — cuts that are greater than any increase in the debt limit."

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