US Treasury Secretary Timothy F Geithner said so-called extraordinary measures he’s taking to avoid breaching the debt ceiling would work only until mid-February to early March and warned that failure by Congress to raise the limit could “impose severe economic hardship” on the country.
“Congress should act as early as possible to extend normal borrowing authority in order to avoid the risk of default and any interruption in payments,” Geithner said in a letter on Monday to House Speaker John Boehner. In the letter, released by the Treasury, Geithner said the department will “provide a more narrow range” of dates with a “more targeted estimate at a later date”.
Geithner’s estimate is similar to one made by the Washington-based Bipartisan Policy Center last week. The centre projected that sometime between February 15 and March 1, the Treasury will no longer have sufficient funds to pay all its bills.
Republicans in Congress are demanding spending cuts in exchange for raising the $16.4 trillion debt ceiling. President Barack Obama warned them on Monday against using the limit as leverage in the spending debate, saying “markets could go haywire” and government payments, from Social Security checks to military salaries, will be held up if the limit isn’t increased.
Bond investors
US Treasury bond investors — who most directly bear the risk of a government default — haven’t been alarmed. The 10-year yield dropped two basis points, or 0.02 percentage point, to 1.84 per cent at 5 pm New York time, according to Bloomberg Bond Trader prices.
The yield earlier touched 1.83 per cent, the lowest level since January 3.
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Bond investors were also unrattled during a debt-limit debate in 2011. Yields on 10-year US Treasury notes declined from 2.96 per cent on July 22 to 2.56 per cent on August 5, 2011, the day Standard & Poor’s downgraded the US credit rating.
Yields continued to drop, reaching 1.72 per cent on September 22 of that year.
Invoking Reagan
Geithner’s letter echoes warnings he made in 2011, when the administration and Republicans debated for months before raising the debt ceiling. He cited possible “severe hardship” in a letter to congressional leaders in April of that year. In both today’s letter and one he sent to then-Senator Jim DeMint in June 2011, Geithner cited President Ronald Reagan as warning about the dangers of moving too close to default.
“If the extraordinary measures were allowed to expire without an increase in borrowing authority, Treasury would be left to fund the government solely with the cash we have on hand on any given day,” Geithner wrote in the letter. “Cash would not be adequate to meet existing obligations for any meaningful length of time because the government is currently operating at a deficit.”
Geithner said failure by the US to meet its payment obligations “would cause irreparable harm to the American economy and to the livelihoods of all Americans. Even a temporary default with a brief interruption in payments that Congress subsequently restores would be terribly damaging”.
Government spending
In a statement responding to Obama’s comments, Boehner, an Ohio Republican, said the “American people do not support raising the debt ceiling without reducing government spending at the same time.”
“The consequences of failing to increase the debt ceiling are real, but so too are the consequences of allowing our spending problem to go unresolved,” Boehner said. “Without meaningful action, the debt will continue to act as an anchor on our economy, costing American jobs and endangering our children’s future.”
Senate Republican leader Mitch McConnell said the debt ceiling debate is the “perfect time” to address spending.
“We are hoping for a new seriousness on the part of the president with regard to the single biggest issue confronting the country and we look forward to working with him to do something about this huge, huge problem,” McConnell, of Kentucky, said in a statement.
Though the 2011 impasse ended that August with Obama signing a debt-ceiling increase, S&P downgraded the US three days later, citing political gridlock in Washington and the nation’s long-term fiscal challenges.
Investors were undeterred by the rating change and Treasuries staged their biggest rally since December 2008, returning 2.8 per cent in August 2011.