US Treasury to cut issues as May 16 debt cap nears

The US Treasury © AFP/File Karen Bleier

AFP

WASHINGTON (AFP) – The US Treasury said Monday it would begin cutting certain debt issues as it confirmed the government would reach its borrowing ceiling on May 16.

With Congress still not agreed on raising the ceiling to permit the government to continue financing its spending, the Treasury said it would stop issuing state- and local-government series securities on May 6, money used for things such as local infrastructure development.

While the move appeared aimed at sparking pressure from the states on the legislature, it also would help buy time for a political deal on the ceiling, by extending to August 2 the time the country would be forced to stop borrowing and possibly default on its debt.

“Because the United States is very close to reaching the debt limit, Treasury must take this action now,” Treasury Secretary Timothy Geithner said in a letter to Democratic Senator Harry Reid, the leader of the US Senate.

“However, it is not without costs; it will deprive state and local governments of an important tool to manage their outstanding debt expenses,” he said.

If Congress does not increase the limit, currently at $14.29 trillion, by May 16, the department will have to take “further extraordinary measures” to allow it to continue servicing the country’s debt without default, Geithner said.

“Default by the United States on its obligations would have a catastrophic economic impact,” he said.

Geithner said he intends to declare a “debt issuance suspension period” on May 16.

During the period the Treasury would stop issuing bonds to the civil service retirement and savings funds and, if necessary, to the government’s exchange stabilization fund.

Such measures, along with tax receipts that are running more than expected, could buy room for continued borrowing through about August 2 — three weeks longer than had been projected.

“While this updated estimate in theory gives Congress additional time to complete work in increasing the debt limit, I caution strongly against delaying action,” said Geithner.

The Democratic and Republican political parties have been sharply divided over raising the cap on the country’s borrowing.

With the US debt and government deficit soaring, Republicans say they want the White House to commit to more spending cuts before they agree to raising the ceiling.

Seeking a compromise, last Wednesday Reid, the Senate majority leader, proposed that the government attach a “deficit cap” to legislation raising the borrowing cap.

While the White House has branded Republican tactics irresponsible, last month the country came under international pressure to begin cutting spending, raising revenues, and reduce its debt.

On April 18 Standard & Poor’s cut the outlook on US sovereign debt to “negative,” the first time the ratings agency has ever placed such a warning on the US’s gold-standard AAA rating.

S&P said it did not see Washington agreeing a plan for addressing its debt before the November 2012 presidential election.

The International Monetary Fund has urged the country to “urgently” address its problems, and its chief economist said the US had no credible medium-term plan for its problems.

And China, by far the country’s biggest creditor, urged Washington to adopt “responsible measures” to address its deficit and debt levels.

But Geithner said that, political differences notwithstanding, under either party’s proposed budgets for the coming year, the debt ceiling would have to be raised.

It would be “irresponsible” for politicians to use the US’s good credit standing “as a bargaining chip to advance partisan policy agendas,” he said.

© AFP — Published at Activist Post with license