Treasury Details Steps to Avoid Default - WSJ.com#

Treasury Details Steps to Avoid Default - WSJ.com#: "Treasury Will Act to Avoid Default"


Treasury Will Act to Avoid Default

By NAFTALI BENDAVID And DAMIAN PALETTA
"Treasury Department officials said Monday that they will begin to take extraordinary actions Friday to manage the government's finances so the U.S. won't default after hitting its borrowing limit on May 1.

The moves come amid divisions among congressional leaders over how to raise the $14.29 trillion debt limit and avoid a default that Treasury officials say could cause another financial crisis.

Treasury Secretary Tim Geithner told lawmakers last month that the U.S. would hit the debt ceiling by May 16 and could default as soon as July 8. Officials now estimate that the actions announced Monday, combined with stronger-than-expected tax receipts, will enable the government to postpone a possible default until Aug. 2. But the longer Congress delays raising the debt ceiling, the greater the risk that markets will fall due to fears that the government won't meet its financial obligations.

In the first emergency step, Treasury on Friday will stop issuing state and local government series securities, commonly known as SLGS. That could make it harder for states and cities to issue debt, because they will have to seek issuers in the private market.

If the debt limit hasn't been raised by May 16, the government will begin delaying payments into two government pension funds and redeeming Treasury securities in those funds. It also will suspend its daily investment of Treasury securities into another government employees' retirement plan.

In addition, Treasury officials are prepared to suspend their daily reinvestment of Treasury securities held as investments in the Exchange Stabilization Fund, a fund held by the government to guard against exchange-rate fluctuations.

The government had $14.231 trillion in debt as of April 28, $63 billion under the ceiling. Mr. Geithner, in a letter to Congress, urged lawmakers to act "as soon as possible" to raise the cap.

"Default by the United States on its obligations would have a catastrophic economic impact that would be felt by every American," Mr. Geithner wrote. At that point, he said, the government would stop or delay in such payments as military salaries, Social Security checks and tax refunds.

Raising the debt limit is unpopular with many voters. Leaders of both parties have decided to soften the blow by attaching budgetary restraints to any vote to raise the debt ceiling, but they are battling over what sort of restraints.

Democrats want to cap the deficits that the government can run up each year, which have now reached $1.5 trillion. Republicans fear a deficit cap would mean tax increases as Congress struggles to close its deficits, and they are pushing for a spending limit instead.

"You can count on House Republicans saying that if Congress is going to raise the debt ceiling, there has to be considerable spending reforms attached to that," said Rep. Peter Roskam (R., Ill.).

Democrats attacked Republicans for threatening to block a debt-ceiling increase if they don't get the conditions they want. "The idea that in the name of fiscal responsibility people would say we're not going to raise the debt ceiling is a joke, to be honest with you," said Sen. Michael Bennet (D., Colo.).

Many GOP freshmen ran biting television ads last fall during the midterm election campaigns against Democratic incumbents for raising earlier debt limits, making it hard for the Republicans to support an increase this time. GOP leaders plan to canvass their members in coming days to learn what it would take for them to support an increase.

House Speaker John Boehner (R., Ohio) recently told GOP House members he wants to tackle the debt limit as soon as possible, as long as there is a credible plan in place to curtail spending

The debt-ceiling battle comes as a bipartisan group of senators, the so-called Gang of Six, is reaching a critical moment in its plans to release a deficit-cutting plan. The next few days will tell whether the six can unite behind a single package. . "

Write to Damian Paletta at damian.paletta@wsj.com