Geithner Warns Lawmakers Debt Standoff Risks U.S. Default
Treasury Secretary Timothy F. Geithner said he will take “extraordinary measures” to postpone a U.S. default into early 2013 while President Barack Obama and Congress work out a deficit-reduction deal.
Geithner, in a letter to congressional leaders today, said the government will hit its statutory debt ceiling on Dec. 31. To avert a default, the Treasury will take action to create about $200 billion in headroom under the debt limit, which would normally last about two months.
“However, given the significant uncertainty that now exists with regard to unresolved tax and spending policies for 2013, it is not possible to predict the effective duration of these measures,” Geithner said.
Geithner’s letter adds urgency to talks between Obama and congressional Republicans on a deficit-reduction plan. Obama has asked that raising the debt ceiling be part of that plan.
Obama and Congress both return to Washington tomorrow after an abbreviated Christmas holiday. They have five days before a deadline that would start to trigger more than $600 billion in tax increases and spending cuts that might cause a U.S. recession.
House leaders, forced last week to withdraw their latest proposal in the negotiations before it could face a vote, today called on the Senate to act next. They said the Senate should amend bills passed by the House earlier this year, including a one-year extension of tax cuts for all income levels.
“Once this has occurred, the House will then consider whether to accept the bills as amended, or to send them back to the Senate with additional amendments,” said House Speaker John Boehner, an Ohio Republican, in a statement together with Majority Leader Eric Cantor of Virginia, Majority Whip Kevin McCarthy of California and the head of the Republican conference, Cathy McMorris Rodgers of Washington.
A spokesman for Senate Majority Leader Harry Reid, a Nevada Democrat, responded last night that the House should act on a Senate bill that would retain tax cuts for most Americans -- though not, in line with Obama’s position, top earners.
“The Senate bill could pass tomorrow if House Republicans would simply let it come to the floor,” Adam Jentleson, Reid’s spokesman, said in a statement.
Until a higher debt ceiling is approved as part of a deficit reduction deal or separately, Geithner said the Treasury actions would include halting sales of certain securities and stopping new debt issues.
Boehner and Obama have been unable to agree on the tax-rate increase on top earners Obama wants or the cuts to entitlement programs that Boehner seeks, complicating the chances of getting a package done.
Both parties have begun work on minimal deficit-reduction proposals, aimed at avoiding the automatic tax increases and spending cuts while a bigger package is negotiated.
“At this point, all they’re looking for is a fig leaf,” said Stan Collender, a former staff member of the House Ways and Means Committee and the House and Senate Budget committees who is now at Qorvis Communications in Washington. “There’s no grand bargain. There never was.”
The S&P 500 (SPX) declined 0.5 percent to 1,419.83 in New York. The Dow Jones Industrial Average (INDU) dropped 0.2 percent to 13,114.59. The yield on the benchmark 10-year Treasury bond was 1.75 percent, down two basis points, or 0.02 percentage points, according to Bloomberg Bond Trader prices.
The challenge facing Reid and Senate Minority Leader Mitch McConnell, a Kentucky Republican, is to come up with a measure that also can get through the House, which has balked at any tax increases. Senate Republicans don’t want to be on the record supporting higher taxes unless they know the House also would pass it.
“There’s still a chance for them to get a deal,” said Ron Bonjean, a Republican strategist who once served as a spokesman for former House Speaker Dennis Hastert of Illinois and former Senate Majority Leader Trent Lott of Mississippi. “It grows more unlikely by the day, and there’s not a lot of days left.”
Obama and Boehner haven’t spoken since the president flew to Hawaii on Dec. 21, according to a Republican aide who requested anonymity when discussing the negotiations. Obama plans to return to Washington on a flight tonight, while his family will remain in Hawaii, the White House said yesterday.
The House will hold a pro-forma session tomorrow. The chamber’s Republican leaders told rank-and-file lawmakers that they would receive a 48-hour notice before being called back to Washington. The leaders haven’t yet given that notice and are still discussing the schedule, according to a leadership aide who requested anonymity when discussing the plans.
The leaders intend to hold a conference call with rank-and- file members tomorrow at 2:30 p.m. Washington time. Even if the decision was made for members to return to the House, many wouldn’t be back to the Capitol until Dec. 28.
Bonjean put the probability of no deal at 75 percent. Still, he said there’s a chance for one because both parties want to avoid the “fiscal cliff.” That’s the term used by Federal Reserve Chairman Ben S. Bernanke in testimony before the House Financial Services Committee to describe the end of tax cuts first signed into law by President George W. Bush, combined with automatic spending cuts for government programs scheduled to start next month, creating the so-called cliff.
Before going on vacation with his family, Obama urged leaders of both parties to put together an interim bill to keep taxes from rising on middle- and lower-income Americans as the two sides work on a more comprehensive package.
Senate Democratic leaders have said they won’t take action on a fallback plan unless they have assurances from Boehner that he will bring it up in the House and let it pass with a combination of Democratic and Republican votes, and from McConnell that Senate Republicans won’t filibuster it.
“A comprehensive solution to the looming fiscal cliff will need to be a bipartisan solution,” Reid said on the Senate floor Dec. 21. “No comprehensive agreement can pass either chamber without both Democrats and Republican votes.”
Jentleson, in his statement tonight, said: “It is time for House Republicans to put middle-class families first by passing the Senate’s bill to protect 98 percent of Americans from a tax hike on Jan. 1.”
Senator Charles Schumer of New York, the chamber’s third- ranking Democrat, told reporters Dec. 21 that “the key to this is the House.” McConnell wouldn’t “want to have his members put their necks on the line for a deal that may not pass the House,” he said.
Schumer and Reid called on Boehner to resume talks with Obama. Failing to reach a budget deal would push the U.S. into recession for the first half of 2013, according to the nonpartisan Congressional Budget Office.
“At this point there’s zero percent chance of a big deal and maybe a 10 percent chance of a small deal before Jan. 1,” Collender said. He has predicted a no-deal scenario since before the Memorial Day holiday in May, and said the past two weeks of inaction reinforced his projection.
At this point, Collender said, whether the Senate moves first won’t matter.
“Nothing will move House Republicans if they don’t feel like getting moved,” he said. “They’ve never been swayed by the Senate before.”
Republicans have attempted to use the need for a debt-limit increase to force deeper spending cuts, replicating the 2011 showdown that caused the U.S. to come within days of default and led to a credit-rating downgrade.
Geithner listed four “extraordinary measures” that could be used to create more “headroom” under the debt ceiling. One would be to suspend sales of State and Local Government Series Treasury securities. The Treasury said it would begin that action on Dec. 28, affecting about $4 billion to $17 billion of the securities issued a month.
Second, the Treasury could declare a debt issuance suspension period, which permits it to take actions related to special-issue Treasury securities held for investment by government retirement funds. The Treasury said a two-month suspension would free up around $12 billion, while additional room could be created through a one-time suspension of interest reinvestment at year end.
Once the debt limit is reached, the Treasury may suspend the daily reinvestment of Treasury securities held by the Government Securities Investment Fund of the Federal Employees’ Retirement System Thrift Savings Plan. Because the money market fund balance is about $156 billion, “using this measure can immediately create up to approximately $156 billion in headroom,” Geithner said in an appendix to his letter.
The Treasury may also suspend the daily reinvestment of Treasury securities held by the Exchange Stabilization Fund, Geithner said. “This would create up to approximately $23 billion in headroom,” the appendix said.
Moody’s Investors Service said the negative outlook on the U.S.’s Aaa rating will likely be resolved based on budget negotiations, as the nation eventually raises its debt ceiling.
“We expect the government will act to raise the limit, as it has done on many occasions in the past,” Moody’s said today in a statement. “Our view is that the probability of a missed interest payment on Treasury bonds is extremely low.”
Reid said Boehner risks his House speakership if he put before the House a tax deal that would get a majority of Democrats to support it and few -- perhaps less than 50 -- Republicans.
“The Republican caucus would never forgive him,” he said. “The statesmanlike thing to do would be to say, ‘I’m the speaker of the House, not the head of the Republican Party.’ That is the equivalent of never running for speaker again.”
Boehner, first elected speaker in January 2011, was selected by his Republican conference as its nominee to continue in the post in the new Congress that convenes next week. He needs an absolute majority of those present and voting on Jan. 3 in the 425-seat House to be re-elected. Republicans will hold 234 seats to begin the 113th Congress in January. If re-elected, Boehner will have more freedom to cut a deal, Collender said.
Until Dec. 17, Obama and Boehner had been edging closer to a deal that included $1 trillion each in tax increases and spending cuts. Boehner had put tax-rate increases on the table for income above $1 million a year, infuriating some lawmakers backed by anti-tax Tea Party groups.
That was the proposal he pulled from the House floor on Dec. 20 rather than see it defeated by his own caucus members.
Both Obama and Boehner have offered concessions in talks, in person and by telephone, since Dec. 5.
The president initially sought $1.6 trillion in new revenue, including a return to pre-Bush income tax rates for annual household income over $250,000 a year. The speaker first rejected any increase in tax rates, instead offering $800 billion in revenue by limiting unspecified exemptions.
After Boehner proposed raising taxes for households earning more than $1 million a year, Obama countered with a proposal to raise taxes on more than $400,000 of income.
Obama also has agreed to accept cuts in entitlement spending on programs such as Medicare, while Boehner has maintained that new taxes and spending cuts must be balanced on a one-to-one basis.
In sum, the two have approached the outlines of a plan that would raise about $1 trillion in tax revenue and cut about $1 trillion in spending.
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