Street Scrambles for Debt-Issuance Ideas if Ceiling Not Lifted
Government officials are scrambling to come up with ways to sell debt even if the nations debt ceiling isnt raised by early next week, though officials are remaining silent on just what course of action they might take, and its unclear if any of the options discussed would be enough to meet the countrys massive borrowing needs, the FOX Business Network has learned.
The issue of how to borrow outside the debt limit emerged during a regularly scheduled, though timely meeting, Friday between officials at the Federal Reserve, the Treasury Department and 20 banks that buy US debt.
Government officials hold meetings with Wall Street dealers prior to bond auctions, like the one that is scheduled to take place on Monday. But this meeting took on special significance since on Tuesday the Treasury is scheduled to run out of money to pay all the nations bills unless the debt ceiling is lifted as part of a budget deal in Washington.
By midday Friday, such a deal remained elusive, which prompted government officials to discuss with Wall Street ways in which the Treasury could raise money if the debt ceiling isnt raised anytime soon. Sources at the meeting said the participants discussed three options, but the one that seemed most plausible involved the issuance of so-called cash management bills, which are short-term IOUs that allow the government to raise money outside the debt limit since these bills are quickly repaid once tax revenues are collected.
Government officials and the Wall Street executives also discussed holding smaller auctions than usual, and only selling bonds when older issues mature so as not to sell debt above the $14 trillion debt limit. Dealers said such a move could be disruptive to the market.
Another option discussed was to sell bonds on a when issued basis, meaning the Treasury sells the bonds to investors, the securities are free to trade and the auctions where money is delivered to the government officially begin when the debt ceiling is finally hiked.
In this scenario the government would be guaranteed the money once the budget impasse ends, but dealers said such a move would be nearly impossible to pull off because the market couldnt price the securities thanks to uncertainty of the timing of when the auction will eventually occur.
A Treasury spokesman said "today's meeting allowed Treasury to continue its regularly scheduled conversations and provided an opportunity for all dealers to share their views on Treasury market functioning and the auction calendar in advance of August 2."
Sources who attended the meeting said the Treasury provided no guidance about a course of action, other than to say that the August 2 deadline assigned by Treasury Secretary Tim Geithner is a real one, despite some reports stating that the government wont run out of money until the following week.
One Wall Street executive at the meeting suggested that Treasury repo its portfolio of mortgage-backed securities, which it purchased from Fannie Mae and Freddie Mac during the 2008 financial crisis. In a repo trade, the Treasury would temporarily raise cash by selling the securities and buying them back at a later date. The Treasury holds just under $100 billion of mortgage-backed securities from the bailout of Fannie Mae and Freddie Mac.
Government officials offered no response to the suggestion.