Geithner takes steps to avoid default as US reaches $14.3T debt limit

The U.S. government officially hit the federal debt limit
Monday, forcing the Treasury Department to make moves to avoid a default and
ratcheting up pressure on lawmakers to reach a deal to increase it.

Treasury Secretary Timothy Geithner informed lawmakers in a
Monday letter of specific steps he was taking to avoid a default.

The Treasury had known for weeks that May 16 would be the
date on which the government would hit the limit, and the event is not expected to be of
immediate economic consequence.

{mosads}However, it does mean the Treasury must begin a series of
“extraordinary measures” to ensure the government keeps making payments on its
legal obligations and averts a default.

In the letter to congressional leaders, Geithner wrote that
Monday marked the beginning of a “debt issuance suspension period,” and that
his agency would tap into two government employee pension funds to free up cash.

Geithner has told lawmakers the Treasury has the tools to
prevent a default until the beginning of August. However, lawmakers need to
reach a deal by Aug. 2 or risk “catastrophic economic consequences
for citizens,” Geithner warned Monday.

A deal to raise the ceiling seems far off for now.
Congressional Republicans and the White House have begun negotiations but
disagree over spending cuts, entitlement reforms and whether tax hikes should
also be considered to lower the deficit.

With the House on recess, negotiators led by Vice President
Joe Biden will not be meeting this week.

The Treasury Department already had begun to take emergency
measures to prevent a default.

On May 6, the Treasury stopped issuing State and Local
Government Series Treasury securities (SLGS). These special securities can be
bought by state and local governments working to refund municipal bond deals,
and count against the debt limit. Shutting down issuance of those securities
slows down how fast the Treasury hits the debt limit.

The steps Geithner announced Monday represent two more ways for
the government to work around the debt limit temporarily. Specifically, the
Treasury can free up $12 billion over two months by halting new investments in
the Civil Service Retirement and Disability Fund and redeeming existing
investments in that fund to free up cash.

He also has the one-time option of not reinvesting
securities that mature in that federal employee retirement fund, as the
Treasury usually would do. In that situation, the Treasury could free up $67
billion more in headroom on June 30, when some of those securities mature.

Along similar lines, Geithner announced Monday that he
was slowing investment in the Government Securities Investment Fund for federal
employees’ retirement. By halting reinvestment in the money market fund, the Treasury
can create about $130 billion more in headroom.

To further delay a default, the Treasury also can stop
reinvesting its Exchange Stabilization Fund in Treasury securities. Used to buy
and sell foreign currencies, the dollar-balance of that fund is typically
invested in Treasuries. But the government can free up roughly $23 billion
under the debt limit by not investing those funds, losing out on interest by
keeping it in cash.

Geithner warned that while these steps have been used in the
past when Congress has lagged on raising the debt ceiling, they would be “less
useful” this time around. The government has increased the amount it borrows
monthly over the years, meaning each of these steps buys less time than they
had previously.

His request comes as lawmakers in both parties are
continuing to debate over what should be paired with an increase to the debt
limit.

House Speaker John Boehner (R-Ohio) has called for any
increase to be paired with at least an equal amount in spending cuts, while
Senate Republican leader Mitch McConnell (R-Ky.) said Sunday that he wanted to
see a two-year spending cap, as well as big cuts to both mandatory and
discretionary spending over the long term.

Another wrinkle in the debate is whether GOP leaders can convince
rank-and-file members to support an agreement. Some members, including those in
the large freshman class, have aired skepticism about what is really at stake
with the debt limit.

Sen. Pat Toomey (R-Pa.) has repeatedly criticized the
Treasury for engaging in “scare tactics” when discussing the debt limit, and is
pushing legislation he says will allow the government to hit the ceiling
without defaulting. The Republican Study Committee in the House has introduced
a similar bill. However, Treasury officials maintain that such an arrangement
would be unworkable.

Democrats and the White House have ramped up warnings on
the debt limit in recent days, painting a more specific but still bleak picture
of what would happen if Congress were to refuse to boost it.

In a letter sent Friday, Geithner told Sen. Michael Bennet
(D-Colo.) that any default would do “irrevocable damage” to the nation’s
economy and would “likely push us into a double-dip recession.”

“This would be an unprecedented event in American history. A
default would inflict catastrophic, far-reaching damage on our nation’s
economy, significantly reducing growth, and increasing unemployment,” he told
the senator, who had asked Geithner and Federal Reserve Chairman Ben Bernanke
what would happen if Congress did not raise the debt limit.

Boehner has worked to hit a balance in the spending debate.
He has regularly maintained that the debt limit must eventually go up, while
still arguing that Republicans will not support a hike without major spending
reforms.

—This story was posted at 9:51 a.m. and updated at 11:47 a.m.