Geithner Says U.S. Can Take ‘Extraordinary’ Steps to Borrow Until Aug. 2

By taking “extraordinary measures,” the U.S. can keep borrowing until Aug. 2 after reaching its $14.29 trillion legal debt limit no later than May 16 unless Congress acts, Treasury Secretary Timothy F. Geithner said.

The Treasury Department will take steps starting this week to provide additional borrowing room, Geithner said in a letter today to Senate Majority Leader Harry Reid, a Nevada Democrat, and other congressional leaders. The Treasury pushed the August deadline back from July 8 “as a result of stronger-than- expected tax receipts,” Geithner said. The May 16 date is unchanged from an estimate he made last month.

Geithner said the Treasury on May 6 will stop issuing State and Local Government Series securities. The bonds, known as SLGS, “fund a variety of expenditures, including infrastructure improvements across the country,” he said.

“Protecting America’s creditworthiness and our economic leadership position in the world is a duty to our country that is shared by policy makers in both parties, in the legislative branch as well as the executive branch,” Geithner said. “Any attempt by either party to use the full faith and credit of the United States as a bargaining chip to advance partisan policy agendas would be irresponsible.”

Obama’s Outline

President Barack Obama has offered the outlines of a plan to reduce the debt by $4 trillion over 12 years through a combination of spending cuts and tax increases. House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, has proposed cutting spending by $6 trillion over a decade in part by privatizing Medicare and capping Medicaid spending.

If Congress doesn’t raise the debt limit by May 16, the Treasury will declare a “debt-issuance suspension period” under the statute governing the Civil Service Retirement and Disability Fund, Geithner said. That will allow the U.S. “to redeem existing Treasury securities held by that fund as investments.”

Lawmakers “don’t get serious about raising the debt limit until right before Treasury hits the wall,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “Perhaps the extra few weeks will be helpful, though I suspect that, as usual, negotiators will simply dither until we get close to the drop-dead date, whatever that turns out to be.”

‘Next Steps’

Geithner’s letter shows that “the mechanics are now in motion” for the government to take the “next steps” if the debt limit isn’t raised, said Drew Matus, a senior economist at UBS Securities LLC in Stamford, Connecticut.

SLGS are Treasury securities issued to states and municipalities “to help them conform to tax rules that restrict the investment of proceeds from the issuance of tax-exempt bonds,” Geithner wrote.

Though the updated August deadline “in theory gives Congress additional time to complete work on increasing the debt limit, I caution strongly against delaying action,” Geithner said in the letter. “The economy is still in the early stages of recovery, and financial markets here and around the world are watching the United States closely.”

Matthew Zames, chairman of a Treasury advisory panel and a managing director at JPMorgan Chase & Co. (JPM), said last week that failure to raise the debt limit could be “catastrophic.”

‘Uncharted Territory’

“Any delay in making an interest or principal payment by Treasury even for a very short period of time would put the U.S. Treasury and overall financial markets in uncharted territory, and could trigger another catastrophic financial crisis,” Zames, chairman of the Treasury Borrowing Advisory Committee, wrote in a letter to Geithner.

Treasury also lowered its estimate today for government borrowing from April through June because of higher revenue and reduced government spending.

Borrowing will total a net $142 billion in the current quarter, which is $156 billion less than estimated three months ago, the department said in a statement today. The Treasury also projected borrowing of $405 billion in the three months to Sept. 30. In the quarter that ended March 31, the Treasury borrowed $265 billion, compared with a previous estimate of $237 billion.

The Treasury’s quarterly debt sales announcement is scheduled for May 4.

The Treasury said its forecasts assume a cash balance of $95 billion for June 30 and $115 billion for the end of September.

The U.S. economy slowed more than forecast in the first quarter as government spending declined by the most since 1983 and household purchases cooled. Gross domestic product rose at a 1.8 percent annual rate from January through March after a 3.1 percent pace in the final three months of 2010, the Commerce Department said last week.

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Vincent Del Giudice in Washington at vdelgiudice@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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