The debate over the debt ceiling is likely to be another flash point in the capital’s tumultuous negotiations over taxes and spending — even if lawmakers are able to pass a measure to avoid a series of deep spending cuts and sharp tax increases set to take effect at the end of the year.
President Obama has demanded that the debt limit be taken off the table as a negotiating point, but Republicans say it is an important piece of leverage needed to force spending cuts and restrain the growth of government. It was the debt-limit debate in the summer of 2011, when the nation came within days of default before a deal was struck, that led to the legislation that has helped create the year-end “fiscal cliff.”
How and whether the fiscal cliff is resolved will affect how much time the Treasury has in pushing back the date of default.
If the nation goes over the fiscal cliff, two forces will work against each other. Taxes would rise and spending would be cut, requiring less U.S. borrowing and potentially delaying default. Higher unemployment and a recession would also be likely, depressing tax receipts and requiring more borrowing.
In contrast to the fiscal cliff, defaulting on the debt would cause an immediate financial earthquake, probably causing intense volatility in the markets given the special role played by U.S. government debt.
The federal government borrows about $100 billion a month, and Geithner’s letter to Congress said undertaking “extraordinary measures” — as the Treasury did in 2011 — could create about $200 billion of room to continue borrowing.
“However,” he wrote to lawmakers, “given the significant uncertainty that now exists with regard to unresolved tax and spending policies for 2013, it is not possible to predict the effective duration of these measures.”
As part of these efforts, the Treasury will suspend on Friday a program that helps states and localities manage their borrowing, freeing up $4 billion to $17 billion to spend elsewhere.
Then, after Monday, Treasury can tap a range of federal funds that benefit government employees — most critically, the money-market fund in which many federal employees invest as part of their thrift savings plans. These efforts could create $185 billion in borrowing space.
Federal employees would be unaffected, as long as Congress ultimately raises the debt limit by the final deadline.
Finally, the Treasury can tap a fund used to buy and sell foreign currencies known as the exchange stabilization fund, which would open up about $23 billion in headroom.
In 2011, Treasury examined a range of options to delay the deadline beyond what could be achieved with these “extraordinary measures” — including selling the country’s gold stockpile or other federal assets.
At the time, Treasury officials concluded that the best option, if they ran out of borrowing authority, was to simply not make a given day’s federal payments until Treasury had enough money to write checks to meet all obligations for that day.
(Even if it can’t borrow money, Treasury is constantly receiving tax revenue.)
“Treasury reached the same conclusion that other administrations had reached about these options,” the Treasury inspector general wrote in analysis. “None of them could reasonably protect the full faith and credit of the U.S., the American economy, or individual citizens from very serious harm.”
After last year’s debt-limit debacle, the ratings firm Standard & Poor’s downgraded U.S. government debt for the first time, arguing that the paralysis of Washington policymaking was posing new risks to investors in U.S. government bonds.
That had little effect on U.S. interest rates.
S&P and other ratings firms have threatened to downgrade the country again if lawmakers are not able to find a sensible resolution on the fiscal cliff and the debt limit.
As part of the resolution to last year’s conflict, the White House and Congress agreed to a plan to raise the debt limit through the 2012 election in such a way that it would happen automatically unless Congress rejected it.
Obama has suggested renewing that approach, but Republicans refused. In his latest offer to the White House, House Speaker John A. Boehner (R-Ohio) offered to raise the debt limit for a year for an equivalent amount of spending cuts. Obama asked for two years — although there is some indication he would be content with one.
Some Democrats have urged Obama, as an alternative, to invoke the 14th Amendment, which says that the validity of the public debt “shall not be questioned.” But the president has made it clear he does not view that as an option.