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Tags: Treasurys Moves to Stave off Default

Factbox: Treasury's Tools to Stave Off Default

Monday, 16 May 2011 10:03 AM EDT

The U.S. government will hit the $14.3 trillion legal limit on its debt Monday, according to the Treasury Department.

The department has already begun to take measures to stave off a default on U.S. debt or other obligations and it plans Monday to start dipping into federal pension funds.

That action is one of several the Treasury could take to buy time for the Obama administration and lawmakers to strike a deal to raise the debt ceiling, but it has warned it will run out of maneuvering room by about Aug. 2.

The following is a rundown of measures the Treasury has either employed, will employ Monday or could employ in the future to push back the date on which the current debt limit becomes binding:


The Treasury on May 6 suspended sales of State and Local Government Series securities — known as "slugs" — which are special, low-interest Treasury securities offered to state and local governments to temporarily invest proceeds from municipal bond sales.

Slugs, which count against the debt limit, have been suspended six times in the past 20 years to avoid hitting the debt ceiling. The last time they were halted was in September 2007. So far in fiscal 2011, which began on Oct. 1, the Treasury has sold $47.4 billion in slugs to muni bond issuers.


The Treasury will suspend investments Monday in the Civil Service Retirement and Disability Fund, a government employee pension fund, and redeem certain investments.

Initially, the Treasury can claw back $12 billion in borrowing room by declaring a two-month "debt issuance suspension period," a legal determination specific to this fund. It could also declare a one-year suspension that would free up $72 billion in borrowing ability — an amount equal to about one year's worth of benefit payments.

On June 30, the Treasury has another option to halt reinvestment of $67 billion of the fund's securities that mature on that date. But the Treasury has noted it has a bond interest payment of $12 billion due on June 30, diminishing the effect of that maneuver. It must also replace any missed contributions and lost earnings to the fund once the borrowing limit is raised.


The Treasury will suspend reinvestments Monday in another federal employee pension fund known as the G-Fund, which has a balance of about $130 billion. Normally the money market-like fund reinvests its entire balance daily into special-issue Treasury securities that count against the debt limit. Halting reinvestments would instantly claw back $130 billion in borrowing capacity, but the Treasury must make the fund whole for any lost earnings once the debt limit impasse ends.


The Treasury could dip into this seldom-used $50 billion fund earmarked to stabilize currency rates and access the dollar balance — currently about $23 billion — to avoid debt issuance. Created during the Great Depression of the 1930s, the fund was last used as a backstop to guarantee money market mutual funds during the financial crisis from September 2008 to September 2009. The Treasury would not have to restore lost interest earnings to the fund.


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. But this is unlikely to buy much time and officials are wary of making any major shifts in the Treasury's debt issuance calendar, which could upset markets.


Treasury secretaries in the past have halted sales of U.S. savings bonds to the public during debt limit impasses, but Treasury Secretary Timothy Geithner argues this would be of little or no use. It would not free up borrowing authority and it would only prevent small amounts of new debt from being issued. Savings bond sales increase the debt by less than $220 million per month on average, giving this measure little potency during a time of trillion-dollar deficits.


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, the Treasury says this measure is also of little use because of the very small amount of obligations available for exchange. The Government Accountability Office has estimated that based on data from last Aug. 31, this measure offered just $4.8 billion in borrowing headroom at that time.


The government could raise money by selling off chunks of companies it bailed out under its $700 billion Troubled Asset Relief Program. However, Geithner has said this may not be a viable option because taxpayers could end up suffering losses from a "fire sale" of financial assets.

He also said selling U.S. gold holdings could undermine confidence in the United States. And a recently announced plan to sell down the Treasury's mortgage-backed securities portfolio at a rate of $10 billion a month is not expected to make a material difference on the debt limit.

Treasury and insurer American International Group Inc said on May 11 they would sell 300 million shares, which at Friday's closing price would net about $9 billion for taxpayers. The government's 1.66 billion AIG common shares have taken a hit in recent weeks. At their peak in January, the government's holdings were valued at $87.4 billion, but that value now is down to about $50.49 billion.

The Treasury also anticipates initial public offerings this year in automaker Chrysler Holdings and lender Ally Financial Inc, formerly GMAC. It can resume selling General Motors shares after a lock-up agreement expires in late May.


The Treasury was able to stave off its debt limit reckoning by about a month because the April tax filing season produced higher-than-expected receipts.

Job growth is picking up, arguing for higher income tax withholding, but many economists have expressed concern that high fuel and food costs, coupled with lower government spending, may slow economic growth.

© 2024 Thomson/Reuters. All rights reserved.

The U.S. government will hit the $14.3 trillion legal limit on its debt Monday, according to the Treasury Department.The department has already begun to take measures to stave off a default on U.S. debt or other obligations and it plans Monday to start dipping into federal...
Treasurys Moves to Stave off Default
Monday, 16 May 2011 10:03 AM
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