March 2, 2011
Now that all auctions from last week have settled, the real debt picture has emerged: as of February 28, total US debt was $14,194,764,339,462.64 (a settlement change of $57 billion on the day alone). As a reminder, the total debt limit is $14.24 trillion, or $100 billion away. Purists will interject that the total debt includes $52 billion in debt that is not subject to the debt limit, so in reality the total remaining capacity is $151 billion, although should total debt pass the ceiling, with or without the technicality, it will be pretty much game over. What is quite relevant is that the winddown of the SLF program is halfway completed, as otherwise the US would be in breach of the debt ceiling right now. Since there is another $95 billion outstanding on the SLF, which with the lack of any Treasury auctions in the coming week, has allowed the Treasury to issue an updated debt limit breach projection:”Today, Mary Miller, Assistant Secretary for Financial Markets at the U.S. Department of the Treasury, issued the following update regarding the projected dates by which the United States will reach the statutory debt limit: “The Treasury Department now estimates that the United States will reach the debt limit between April 15, 2011 and May 31, 2011.” Previously the projected breach range was expected to occur 10 days earlier. In other words, the Treasury is once again panicking, and sending the ball over to the Hill, to make sure politicians add another $1.5 trillion to the debt ceiling, which however, with $2 trillion in total issuance in 2011 will need to be raised just after the end of the new year.
And should Congress not cooperate, here is a list we have compiled previously on many occassions (and which will come back to haunt us again and again), this time coming from Reuters, highlighting all the different options before the Treasury to delay the inevitable debt target, er, ceiling breach.
ISSUE MORE CASH MANAGEMENT BILLS
The Treasury could cut issuance of longer-term government debt and rely more heavily on short-term cash management bills to gain more day-to-day control over debt outstanding. Cash management bills are typically issued for days instead of normal Treasury bill maturities of four weeks to one year. However, officials are likely to be wary of making any major shifts in the Treasury’s debt issuance calendar, which could upset markets.
SUSPEND STATE, LOCAL GOVERNMENT SECURITIES
The Treasury could suspend sales of State and Local Government Series securities, known as “slugs,” which are special low interest-bearing Treasury securities offered to local governments and other tax-exempt entities for the investment of municipal bond-issue proceeds. Slugs, which count against the debt limit, were last halted in September 2007 to avoid hitting the ceiling then. So far in fiscal 2011, which began on Oct. 1, the Treasury has sold $39.6 billion in slugs to muni bond issuers.
CIVIL SERVICE RETIREMENT AND DISABILITY FUND
As it has in the past, the Treasury could suspend payments to the Civil Service Retirement and Disability Fund, a government employee pension fund. The government has recently been contributing an average of $5.8 billion to this fund per month. It would be required to replace any missed contributions and lost earnings. Based on Aug. 31 data, the GAO estimates that these moves could add up to $7.7 billion in borrowing capacity.
EXCHANGE STABILIZATION FUND
The Treasury could dip into this seldom-used $50 billion fund earmarked to stabilize currency rates. Created during the Great Depression of the 1930s, the fund was last used as a backstop to guarantee money market mutual funds during the worst part of the financial crisis from September 2008 to September 2009. The GAO study estimated that this could increase borrowing capacity by $20.4 billion.
GOVERNMENT SECURITIES INVESTMENT FUND
To free up cash, the Treasury can halt reinvestment of another federal employee pension fund known as the G-Fund, which had net assets of about $125 billion at the end of 2010 invested in special short-term Treasury securities with maturities of one to four days. Normally, maturing assets in the G-Fund are reinvested daily. But the Treasury has statutory authority to retain a portion of the fund, as long as it provides proper notification and reimbursement for any lost earnings from the move. Such a move could temporarily claw back $122.3 billion in borrowing capacity.
SWAP FEDERAL FINANCING BANK DEBT
The Federal Financing Bank can issue up to $15 billion in debt on behalf of other government agencies that is not subject to the debt limit. So the Treasury could exchange FFB debt for other debt to reduce the total amount subject to the limit. However, based on Aug. 31 data, the GAO said it had just $4.8 billion in remaining borrowing capacity.
ACCELERATE ASSET SALES
The government could raise money by selling off chunks of companies it bailed out under its $700 billion Troubled Asset Relief Program. However, Treasury officials do not want to consider this as an option, saying accelerated sales would not be beneficial to taxpayers, particularly done amid market turmoil.
Still, the Treasury is planning a stock offering in insurance giant American International Group Inc this spring that is expected to top $15 billion. The government owns 1.66 billion AIG common shares now worth around $66.4 billion and other AIG assets valued at $20 billion.
On Tuesday, the Treasury said it was selling trust preferred securities in Ally Financial Inc received as part of the government’s bailout of the auto and home lender, formerly General Motors Acceptance Corp. It holds about $2.7 billion worth but would not say how much it was selling.
All proceeds will go to the government.
The Treasury also anticipates IPOs this year in automaker Chrysler Holdings. It can resume selling General Motors shares after a lock-up agreement expires in May.
In addition, the Treasury owns $155.7 billion worth of mortgage-backed securities bought from Fannie Mae and Freddie Mac during the financial crisis. But dumping a huge chunk of mortgage bonds onto the market could cause mortgage rates to spike higher, hurting an already fragile housing market.
HOPE FOR HIGHER TAX RECEIPTS
The Treasury also could stave off its debt limit reckoning if tax receipts come in higher than expected due to stronger economic growth. Receipts in the first four months of fiscal 2011 were up 9.0 percent — a $65 billion increase — versus the year-earlier period. Outlays in the same period were up $53 billion, or 5 percent. Stronger economic growth, increased employment and a rising stock market would produce more income, reducing the need to fund government operations with debt.
This article was posted: Wednesday, March 2, 2011 at 5:32 am