April 4 (Bloomberg) -- The U.S. will reach its $14.29 trillion legal debt limit no later than May 16 unless Congress acts before then, Treasury Secretary Timothy F. Geithner said today, and he warned of “severe hardship” for Americans if lawmakers fail to act.
If the limit hasn’t been raised by May 16, the Treasury Department will turn to a toolkit of emergency measures that can provide up to eight weeks of additional borrowing room, Geithner said. That extra time would end about July 8, the Treasury chief said.
“The longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations,” Geithner said in a letter to Senate Majority Leader Harry Reid and other members of Congress.
Congress needs to raise the limit to maintain vital services and avoid “questions about our ability to defend our national security interests,” Geithner said. The U.S. would face sharply higher interest rates and would have to stop or delay payments to the military, retirees and others, he said.
“Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover,” Geithner said. “For these reasons, default by the United States is unthinkable.”
Six-month bill rates declined to a record low today as investors sought the safe haven of short-term government debt. The rate dropped as much as three basis points, or 0.03 percent to 0.1099 percent in New York, according to Bloomberg Bond Trader data. The prior record low of 0.1109 percent was set in November 2009. Treasury also auctioned three- and six-month bills today at the lowest rates since January 2010.
Newly elected Republican lawmakers have been resisting a debt-limit increase while calling for extensive budget cuts. U.S. Senator Marco Rubio, a Florida Republican, has said he won’t approve a debt-limit increase without a range of tax-and-spending reforms.
“We need to use the debt limit itself as the way to ensure that America’s debt limit begins to decline, not always go up,” Rubio said in a March 29 television interview with Fox News. “How about the debt limit starting to go down? These are the kinds of things that I hope we’ll focus on.”
The debt limit fight will be shaped in coming weeks by how voters and markets react to the prospect of a government shutdown, said Stanley Collender, managing director of Qorvis Communications and a former congressional budget analyst. The government’s current spending authority ends April 8.
“If there’s a shutdown and Republicans take it on the chin politically, their appetite for holding the debt ceiling hostage may go down,” Collender said in a telephone interview. “If Democrats take it on the chin or the White House, their appetite for holding the debt ceiling hostage may go up.”
The Treasury will conduct its regular schedule of securities auctions in the event of a government shutdown, an official told Bloomberg News today. A shutdown due to a lack of spending authority is not the same as an inability to borrow because of the debt limit.
Geithner said in his letter today that spending cuts can’t provide the cash needed now, and he warned that the Treasury’s projections won’t change in a way that would give Congress extra time. He also said it would not be “viable” for the U.S. to sell gold, financial investments or student loans.
“There is no alternative to enactment of an increase in the debt limit,” Geithner said. He said that increasing the limit “does not increase the obligations we have as a nation; it simply permits the Treasury to fund those obligations that Congress has already established.”
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said last week that companies, insurance funds and investors would lose access to markets if the U.S. appears to be headed toward a default related to its debt limit.
“If the United States actually defaults on our debt it would be catastrophic,” Dimon, 55, said at a March 30 U.S. Chamber of Commerce event in Washington.
Dimon, who’s also chairman of New York-based JPMorgan, the second-biggest U.S. bank by assets, said the U.S. would be “crazy” to leave the debit-limit question unresolved and that market participants eventually would need to take “drastic action.”
“Companies like us, every single company with Treasuries, every insurance fund, every requirement, it will start snowballing,” Dimon said. “All short-term financing would disappear.”
Geithner’s letter today described the emergency measures his department could take, along with the amount of borrowing room each step could free up. The measures, which have been used by prior administrations, include suspending issuance of state and local government securities, tapping government retirement funds and accessing the exchange stabilization fund.
“These extraordinary measures are less useful than in previous debt limit impasses,” Geithner said. These measures can free up about $230 billion, and the debt increases by about $125 billion each month, he said.
Some tools used by prior administrations, such as suspending savings bond sales or tapping the Federal Financing Bank, wouldn’t have much impact, Geithner said. Others are no longer possible because of changes in cash management and congressional authority, he said.