Treasury to Start Special Measures to Avoid Breaching Debt Limit
Treasury to Start Special Measures to Avoid Breaching Debt Limit
(Bloomberg) -- The Treasury Department is set to start dipping into its toolkit to avoid breaching the U.S. debt limit, as Congress still lacks a clear plan for averting default later this year.
At noon on Friday in Washington, the Treasury will use the first of its so-called “extraordinary measures”: suspending sales of securities that help states and municipalities invest bond proceeds, according to a letter Secretary Janet Yellen sent to Congress last week. The debt ceiling -- which has been on hold for two years and represents the total amount lawmakers permit the government to borrow -- will be reinstated on Sunday.
If Congress doesn’t raise or suspend the limit again, Treasury will be forced to take more special measures to prevent default. The ceiling, which was last set in 2019 at $22 trillion, will adjust to the current level of debt when the suspension ends.
“While this practice has become routine and expected and somewhat ordinary, that doesn’t mean that it’s without cost or without consequences,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center. A default is “extraordinarily unlikely,” but the scenarios “are a little bit unpredictable because they’re subject to the political winds of the day. That could take us to the last minute,” he said.
With no congressional action imminent, the focus will turn to September, after lawmakers return from their August recess. Their precise deadline to avert default is unclear, with Yellen warning that it could come soon after their return, while the Congressional Budget Office estimates Treasury can hold out until sometime in October or November.
A host of Democrats -- including moderate Joe Manchin of West Virginia and Budget Committee Chairman Bernie Sanders, an independent who caucuses with Democrats -- insist that Congress will act in time. But Republicans have already objected to increasing the limit, leaving Democrats with only a handful of options.
Democrats can increase and possibly suspend the limit through the process known as budget reconciliation, which would require no Republican votes to supplement Democrats’ bare majorities. Other options include setting up a standalone bill, negotiating with Republicans on budget items in exchange for a ceiling hike, or tying the measure to other bills that need to pass.
Democrats, however, aren’t in a mood to give concessions in return for what they consider to be simply allowing the government to pay bills racked up in part by the GOP.
Timing Uncertain
It’s uncertain how or when Democrats will act. House Ways and Means Committee Chairman Richard Neal said the House will leave for August recess without acting on the debt ceiling and House Budget Committee Chairman John Yarmuth said there’s no concrete plan on whether to approach the debt ceiling through budget reconciliation.
Meanwhile, Treasury’s cash balance sat at $537 billion as of July 28. The department has said that it will decline to $450 billion by July 31.
After Monday, Treasury has several additional options to avoid a default. Treasury can suspend new investments in several government funds including for civil service retirement and disability, postal service retiree health benefits, exchange stabilization and the Government Securities Investment Fund.
It’s not the first time Treasury has resorted to these moves: Since 1985, the agency has used such measures more than a dozen times.
A Treasury spokeswoman declined to comment beyond Yellen’s letter last week.
In all instances, Treasury was able to avert a government default. However in 2011, the U.S. still received its first credit downgrade from S&P amid Republicans’ refusal to increase the debt limit.
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