Geithner Extends Debt-Ceiling Deadline by Three Weeks to Aug. 2

Tuesday, 03 May 2011 07:25 AM

 

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Treasury Secretary Timothy Geithner said the U.S. will have three weeks more than previously seen before hitting its borrowing limit, giving the White House and Congress more time for a deal to raise the debt ceiling.

The U.S. can borrow until Aug. 2 after reaching the $14.29 trillion limit because of “stronger-than-expected tax receipts” and by taking “extraordinary measures” such as suspending the sale of bonds to finance state and local infrastructure projects, Geithner said in a letter to congressional leaders yesterday. He previously said the deadline would be July 8. Without such measures, the legal limit will be reached May 16, he said.

The Treasury Department will take steps starting this week to provide additional borrowing room, Geithner said in the letter to Senate Majority Leader Harry Reid, a Nevada Democrat, and House Speaker John Boehner, an Ohio Republican. The May 16 date for when the U.S. reaches the limit unless Congress acts is unchanged from an estimate Geithner made last month.

The Obama administration and congressional Republicans are debating how and whether to raise the debt limit. Republicans say they won’t act unless President Barack Obama offers more spending cuts. Geithner and administration officials have warned that global investors will lose confidence in the U.S., hurting the economic recovery, if Congress waits too long to act.

Lawmakers “don’t get serious about raising the debt limit until right before Treasury hits the wall,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “Perhaps the extra few weeks will be helpful, though I suspect that, as usual, negotiators will simply dither until we get close to the drop-dead date, whatever that turns out to be.”

Borrowing Room

Obama has offered the outlines of a plan to reduce the debt by $4 trillion over 12 years through a combination of spending cuts and tax increases. House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, has proposed cutting spending by $6 trillion over a decade in part by privatizing Medicare and capping Medicaid spending.

“Protecting America’s creditworthiness and our economic leadership position in the world is a duty to our country that is shared by policy makers in both parties, in the legislative branch as well as the executive branch,” Geithner said. “Any attempt by either party to use the full faith and credit of the United States as a bargaining chip to advance partisan policy agendas would be irresponsible.”

Issuance to States

Geithner said the Treasury on May 6 will stop issuing State and Local Government Series securities, known as SLGS. The bonds “fund a variety of expenditures, including infrastructure improvements across the country,” he said. The securities are issued to states and municipalities “to help them conform to tax rules that restrict the investment of proceeds from the issuance of tax-exempt bonds,” he wrote.

If Congress doesn’t raise the limit by May 16, the Treasury will declare a “debt-issuance suspension period” under the statute governing the Civil Service Retirement and Disability Fund, Geithner said. That will allow the U.S. “to redeem existing Treasury securities held by that fund as investments.”

Decisions made under Obama account for about $1.7 trillion in new debt, according to a Washington Post analysis of Congressional Budget Office data over the past decade. Policies enacted while George W. Bush was president from 2001 to 2009 account for more than $7 trillion, the newspaper reported.

‘Next Steps’

Geithner’s letter shows that “the mechanics are now in motion” for the government to take the “next steps” if the debt limit isn’t raised, said Drew Matus, a senior economist at UBS Securities LLC in Stamford, Connecticut.

Though the extended August deadline “in theory gives Congress additional time to complete work on increasing the debt limit, I caution strongly against delaying action,” Geithner said in the letter. “The economy is still in the early stages of recovery, and financial markets here and around the world are watching the United States closely.”

Matthew Zames, chairman of a Treasury advisory panel and a managing director at JPMorgan Chase & Co., said last week that failure to raise the limit could be “catastrophic.”

“Any delay in making an interest or principal payment by Treasury even for a very short period of time would put the U.S. Treasury and overall financial markets in uncharted territory, and could trigger another catastrophic financial crisis,” Zames, chairman of the Treasury Borrowing Advisory Committee, wrote in a letter to Geithner.

Borrowing Estimates

The Treasury also lowered its estimate yesterday for government borrowing from April through June because of higher revenue and reduced spending.

Borrowing will total a net $142 billion in the current quarter, $156 billion less than estimated three months ago, the department said in a statement. The Treasury also projected borrowing of $405 billion in the three months to Sept. 30. In the quarter that ended March 31, the Treasury borrowed $265 billion, compared with a previous estimate of $237 billion.

The Treasury’s quarterly debt sales announcement is scheduled for May 4.

The Treasury said its forecasts assume a cash balance of $95 billion for June 30 and $115 billion for the end of September.

For all the debate about the deficit in Washington, bond market yields in the U.S. are lower now than when the government was running a budget surplus a decade ago, even though Treasury Department data show that the amount of marketable debt outstanding has risen to $9.13 trillion from $4.34 trillion in mid-2007.

The yield on the benchmark 10-year note was 3.28 percent yesterday, below the average of about 7 percent since 1980, according to Bloomberg Bond Trader prices.

The U.S. economy slowed more than forecast in the first quarter as government spending declined by the most since 1983 and household purchases cooled. Gross domestic product rose at a 1.8 percent annual rate from January through March after a 3.1 percent pace in the final three months of 2010, the Commerce Department said last week.

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