April 5 (Bloomberg) -- Treasury Secretary Timothy F. Geithner told lawmakers that a failure to raise the debt limit would bring “severe hardship” for Americans as the government is forced to suspend services such as Social Security payments.
Geithner, in a letter to members of Congress, said the U.S. will reach the $14.29 trillion limit on its ability to borrow no later than May 16 if Congress doesn’t act. Republican lawmakers, including Senator Marco Rubio of Florida, have been resisting a debt-limit increase while calling for extensive budget cuts.
“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 yesterday in a letter addressed to Senate Majority Leader Harry Reid.
Geithner’s warning came as lawmakers debated budget legislation needed to avert a government shutdown on April 8, when existing spending authority expires. While the Treasury can continue to sell debt during a shutdown caused by lack of spending authority, it has no such leeway if it runs out of borrowing room.
The debt-limit fight will be shaped by how voters and markets react to the debate over the extension of spending authority, said Stanley Collender, managing director of Qorvis Communications and a former congressional budget analyst.
“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 yesterday.
House and Senate negotiators, joined by the White House, are considering plans to reduce the budget by about $33 billion. Lawmakers have passed $10 billion in cuts so far for the fiscal year.
“The government usually has some wiggle room here as a shutdown will likely result first in a temporary suspension of non-essential government services,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
By contrast, the government will have little leeway if the debt ceiling isn’t raised by May 16. In that case, the Treasury will turn to a toolkit of emergency measures that can provide as many as eight weeks of additional borrowing room, Geithner said. That extra time would end about July 8, the Treasury chief said.
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 yesterday 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 yesterday at the lowest rates since January 2010.
Newly elected Republican lawmakers have been resisting a debt-limit increase while calling for extensive budget cuts. Florida’s Rubio 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.
Geithner said in his letter 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.
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,” Geithner said. “There is no alternative to enactment of an increase in the debt limit.”
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