The U.S. government officially hit the federal debt limit Monday, forcing the Treasury Department to make moves to avoid a default and ratcheting up pressure on lawmakers to reach a deal to increase it.
Treasury Secretary Timothy Geithner informed lawmakers in a Monday letter of specific steps he was taking to avoid a default.
The Treasury had known for weeks that May 16 would be the date on which the government would hit the limit, and the event is not expected to be of immediate economic consequence.
In the letter to congressional leaders, Geithner wrote that Monday marked the beginning of a “debt issuance suspension period,” and that his agency would tap into two government employee pension funds to free up cash.
Geithner has told lawmakers the Treasury has the tools to prevent a default until the beginning of August. However, lawmakers need to reach a deal by Aug. 2 or risk “catastrophic economic consequences for citizens,” Geithner warned Monday.
A deal to raise the ceiling seems far off for now. Congressional Republicans and the White House have begun negotiations but disagree over spending cuts, entitlement reforms and whether tax hikes should also be considered to lower the deficit.
With the House on recess, negotiators led by Vice President Joe Biden will not be meeting this week.
The Treasury Department already had begun to take emergency measures to prevent a default.
On May 6, the Treasury stopped issuing State and Local Government Series Treasury securities (SLGS). These special securities can be bought by state and local governments working to refund municipal bond deals, and count against the debt limit. Shutting down issuance of those securities slows down how fast the Treasury hits the debt limit.
The steps Geithner announced Monday represent two more ways for the government to work around the debt limit temporarily. Specifically, the Treasury can free up $12 billion over two months by halting new investments in the Civil Service Retirement and Disability Fund and redeeming existing investments in that fund to free up cash.
He also has the one-time option of not reinvesting securities that mature in that federal employee retirement fund, as the Treasury usually would do. In that situation, the Treasury could free up $67 billion more in headroom on June 30, when some of those securities mature.
Along similar lines, Geithner announced Monday that he was slowing investment in the Government Securities Investment Fund for federal employees’ retirement. By halting reinvestment in the money market fund, the Treasury can create about $130 billion more in headroom.
To further delay a default, the Treasury also can stop reinvesting its Exchange Stabilization Fund in Treasury securities. Used to buy and sell foreign currencies, the dollar-balance of that fund is typically invested in Treasuries. But the government can free up roughly $23 billion under the debt limit by not investing those funds, losing out on interest by keeping it in cash.
Geithner warned that while these steps have been used in the past when Congress has lagged on raising the debt ceiling, they would be “less useful” this time around. The government has increased the amount it borrows monthly over the years, meaning each of these steps buys less time than they had previously.
His request comes as lawmakers in both parties are continuing to debate over what should be paired with an increase to the debt limit.
House Speaker John Boehner (R-Ohio) has called for any increase to be paired with at least an equal amount in spending cuts, while Senate Republican leader Mitch McConnell (R-Ky.) said Sunday that he wanted to see a two-year spending cap, as well as big cuts to both mandatory and discretionary spending over the long term.
Another wrinkle in the debate is whether GOP leaders can convince rank-and-file members to support an agreement. Some members, including those in the large freshman class, have aired skepticism about what is really at stake with the debt limit.
Sen. Pat Toomey (R-Pa.) has repeatedly criticized the Treasury for engaging in “scare tactics” when discussing the debt limit, and is pushing legislation he says will allow the government to hit the ceiling without defaulting. The Republican Study Committee in the House has introduced a similar bill. However, Treasury officials maintain that such an arrangement would be unworkable.
Democrats and the White House have ramped up warnings on the debt limit in recent days, painting a more specific but still bleak picture of what would happen if Congress were to refuse to boost it.
In a letter sent Friday, Geithner told Sen. Michael Bennet (D-Colo.) that any default would do “irrevocable damage” to the nation’s economy and would “likely push us into a double-dip recession.”
“This would be an unprecedented event in American history. A default would inflict catastrophic, far-reaching damage on our nation's economy, significantly reducing growth, and increasing unemployment,” he told the senator, who had asked Geithner and Federal Reserve Chairman Ben Bernanke what would happen if Congress did not raise the debt limit.
Boehner has worked to hit a balance in the spending debate. He has regularly maintained that the debt limit must eventually go up, while still arguing that Republicans will not support a hike without major spending reforms.
—This story was posted at 9:51 a.m. and updated at 11:47 a.m.