Treasury Says Debt Limit Could Be Reached by April 15

Politics Reuters

The U.S. Treasury said on Tuesday the federal government will hit a $14.294 trillion statutory limit on its borrowing between April 15 and May 31, instead of between April 5 and May 31.

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No specific reason was cited for pushing back the earliest date on which the ceiling might be reached. The Treasury said it will update the projected date at the start of each month.

The strength of tax receipts and the overall health of the economy will be key determinants of the timing.

Congress has routinely raised the debt limit every year since 2002, but Republicans want to tie any hike this time to commitments by the Obama administration and Democrats to deeper spending cuts. If the limit were reached, the government could no longer borrow to fund day-to-day operations, risking a partial shutdown and default on debt payments.

As of Feb. 28, the total public U.S. debt stood at $14.195 trillion, or $99 billion below the limit.
The Treasury has been drawing down a $200 billion Federal Reserve emergency lending account to help avoid hitting the limit, and it has a number of other tools it could deploy to further delay hitting the debt ceiling.

But the Government Accountability Office has warned that these tools will be less effective than in the past because of ballooning borrowing needs. For details see 1/8ID:nN23134517 3/8
The following is a summary of steps the Treasury could take and factors affecting the debt limit:

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ISSUE MORE CASH MANAGEMENT BILLS
The Treasury could cut issuance of longer-term government debt and rely more heavily on short-term cash management bills to gain more day-to-day control over debt outstanding. Cash management bills are typically issued for days instead of normal Treasury bill maturities of four weeks to one year. However, officials are likely to be wary of making any major shifts in the Treasury's debt issuance calendar, which could upset markets.

SUSPEND STATE, LOCAL GOVERNMENT SECURITIES
The Treasury could suspend sales of State and Local Government Series securities, known as "slugs," which are special low interest-bearing Treasury securities offered to local governments and other tax-exempt entities for the investment of municipal bond-issue proceeds. Slugs, which count against the debt limit, were last halted in September 2007 to avoid hitting the ceiling then. So far in fiscal 2011, which began on Oct. 1, the Treasury has sold $39.6 billion in slugs to muni bond issuers.

CIVIL SERVICE RETIREMENT AND DISABILITY FUND
As it has in the past, the Treasury could suspend payments to the Civil Service Retirement and Disability Fund, a government employee pension fund. The government has recently been contributing an average of $5.8 billion to this fund per month. It would be required to replace any missed contributions and lost earnings. Based on Aug. 31 data, the GAO estimates that these moves could add up to $7.7 billion in borrowing capacity.

EXCHANGE STABILIZATION FUND
The Treasury could dip into this seldom-used $50 billion fund earmarked to stabilize currency rates. Created during the Great Depression of the 1930s, the fund was last used as a backstop to guarantee money market mutual funds during the worst part of the financial crisis from September 2008 to September 2009. The GAO study estimated that this could increase borrowing capacity by $20.4 billion.

GOVERNMENT SECURITIES INVESTMENT FUND
To free up cash, the Treasury can halt reinvestment of another federal employee pension fund known as the G-Fund, which had net assets of about $125 billion at the end of 2010 invested in special short-term Treasury securities with maturities of one to four days. Normally, maturing assets in the G-Fund are reinvested daily. But the Treasury has statutory authority to retain a portion of the fund, as long as it provides proper notification and reimbursement for any lost earnings from the move. Such a move could temporarily claw back $122.3 billion in borrowing capacity.

SWAP FEDERAL FINANCING BANK DEBT
The Federal Financing Bank can issue up to $15 billion in debt on behalf of other government agencies that is not subject to the debt limit. So the Treasury could exchange FFB debt for other debt to reduce the total amount subject to the limit. However, based on Aug. 31 data, the GAO said it had just $4.8 billion in remaining borrowing capacity.

ACCELERATE ASSET SALES
The government could raise money by selling off chunks of companies it bailed out under its $700 billion Troubled Asset Relief Program. However, Treasury officials do not want to consider this as an option, saying accelerated sales would not be beneficial to taxpayers, particularly done amid market turmoil.

Still, the Treasury is planning a stock offering in insurance giant American International Group Inc(AIG) AIG this spring that is expected to top $15 billion. The government owns 1.66 billion AIG common shares now worth around $66.4 billion and other AIG assets valued at $20 billion.

On Tuesday, the Treasury said it was selling trust preferred securities in Ally Financial Inc received as part of the government's bailout of the auto and home lender, formerly General Motors Acceptance Corp. It holds about $2.7 billion worth but would not say how much it was selling.

All proceeds will go to the government.

The Treasury also anticipates IPOs this year in automaker Chrysler Holdings. It can resume selling General Motors (GM) shares after a lock-up agreement expires in May.

In addition, the Treasury owns $155.7 billion worth of mortgage-backed securities bought from Fannie Mae and Freddie Mac during the financial crisis. But dumping a huge chunk of mortgage bonds onto the market could cause mortgage rates to spike higher, hurting an already fragile housing market.

HOPE FOR HIGHER TAX RECEIPTS

The Treasury also could stave off its debt limit reckoning if tax receipts come in higher than expected due to stronger economic growth. Receipts in the first four months of fiscal 2011 were up 9.0 percent -- a $65 billion increase -- versus the year-earlier period. Outlays in the same period were up $53 billion, or 5 percent. Stronger economic growth, increased employment and a rising stock market would produce more income, reducing the need to fund government operations with debt.

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