Factbox: Treasury’s tools to stave off default

(Reuters) – The Treasury Department repeated on Wednesday that it will run out of borrowing room on August 2, putting the country at risk of an historic default if Congress has not raised the statutory debt ceiling by then.

The government hit the $14.3 trillion legal limit on its borrowing on May 16 and has been dipping into federal pension funds to give it more borrowing room to pay its bills.

The Treasury has said it could stave off a default on U.S. debt or other obligations until August 2 through the investment suspensions and other extraordinary actions, buying time for Congress to raise the ceiling.

On Tuesday the U.S. House of Representatives defeated a bill to raise the debt ceiling by $2.4 billion. Republicans are insisting on deep spending cuts as a precondition for any agreement on hiking the debt limit.

The United States has never defaulted on its debts and the Obama administration says that doing so would be “catastrophic” for the country’s economic future.

The following is a rundown of measures the Treasury has either already employed or could employ 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 previous 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 October 1, the Treasury has sold $47.4 billion in slugs to muni bond issuers.


The Treasury on May 16 suspended investments in the Civil Service Retirement and Disability Fund, a government employee pension fund, and redeemed certain investments.

By declaring a “debt issuance suspension period,” a legal determination specific to this fund, the Treasury clawed back $17 billion in borrowing room.

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

The Treasury has redeemed existing investments and suspended new investments in this fund five times before over the past 20 years, with the latest action in 2006.


The Treasury on May 16 suspended reinvestments 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 clawed back $130 billion in borrowing capacity, but the Treasury must make the fund whole for any lost earnings once the debt limit impasse ends.

Treasury has suspended reinvestments of all or part of the G-Fund five times over the past 20 years with the last suspension in 2006.


The Treasury could dip into this seldom-used fund earmarked to stabilize currency rates and access the dollar balance — which Treasury said in April stood at 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. However, 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 that 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 amounts of obligations available for exchange. The Government Accountability Office has estimated that based on data from last August 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 was not a viable option because taxpayers could end up suffering losses from a “fire sale” of financial assets.

Selling gold holdings is a possibility but Geithner said it might undermine confidence in the United States. The Treasury has begun selling down its mortgage-backed securities portfolio and said on Wednesday that it had sold $12.9 billion worth in May. It is expected to keep selling MBS at a rate of about $10 billion per month, not enough to make a material difference on the debt limit.


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 has been 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.

(Reporting by David Lawder, Glenn Somerville, Rachelle Younglai; Editing by Andrea Ricci)

(This story was corrected in paragraph 20 to show that the Treasury sold $10.5 billion of MBS and took in $2.4 billion in principal and interest payments, instead of saying it sold $12.9 billion of MBS)