The Treasury Department is confident the new Congress will act by the end of the first quarter of this year to raise the government's debt ceiling, a move that would avert a default by the United States on its obligations and a subsequent financial crisis.
Despite the apocalyptic language used by White House economic adviser Austan Goolsbee over the weekend about the dire consequences of a failure to raise the nation's debt limit from its current level of $14.29 trillion, Treasury officials today called the debate over the debt limit a "routine matter" and played down the feisty rhetoric coming from some lawmakers opposed to an increase.
"It needs to get done; it will get done," one official said. "Whatever you think about taxes and spending going forward, responsible individuals will, I think, have to reach the judgment that defaulting on the US' obligations is an unthinkable thing."
At the moment, the outstanding U.S. debt subject to the limit stands at $13.95 trillion, leaving approximately $335 billion of "headroom" beneath the current limit. Officials gave reporters a copy of a four-page letter Treasury Secretary Tim Geithner sent to Senate Majority Leader Harry Reid saying that failing to raise the debt limit would lead to an unprecedented default by the U.S., while at the same time expressing confidence that it would get done.
"Because Congress has always acted to increase the debt limit when necessary, and because failure to do so would be harmful to the interests of every American, I am confident that Congress will act in a timely manner to increase the limit this year," Geithner states in the letter.
The letter does not "predict with precision" the date by which the debt limit will be reached, citing uncertainty associated with tax receipts and refunds during the spring tax filing season and other variable factors, but says the limit could be reached as early as March 31, 2011 and most likely sometime between that date and May 16, 2011.
There are several "exceptional actions" that Treasury could take to delay the date by which the ceiling is reached -- like suspending sales of State and Local Government Series (SLGS) Treasury securities and suspending reinvestment of the Exchange Stabilization Fund (ESF), among other things. The Department has taken some of these steps in the past but wants to avoid having to repeat them.
The officials who briefed reporters noted that the debate on the debt limit had so far had no impact on bond yields and were not expected to do so -- a sign that investors also believe Congress will act in time. They declined to discuss what kinds of concessions might need to be made pass an increase in the debt ceiling, arguing that budget cuts should be part of a separate discussion.
Geithner had been talking with members of Congress about the issue and would continue to do so, but officials could not provide a list of those contacts.
While the letter was addressed to Reid, the heads of relevant committees in both Houses and "all the Members of the 112th Congress" were cc-ed.
Worst case scenario
Default would have worse and further-reaching effects on the country than the temporary government shutdowns of 1995 and 1996 and could be more harmful than the 2008-2009 financial crisis, causing potentially millions of job losses and hurting the U.S. dollar and the status of U.S. Treasury bonds as safe haven investments, according to the letter. It would also jeopardize a range of payments from Social Security, Medicare and veterans' benefits, to Medicaid and unemployment payments to states, to student loan payments and military and federal civil service salaries.
"It will have enormously negative consequences to the country, to American individuals, families, businesses, the whole gamut and none of that ought to be jeopardized by, you know, whatever the result of an important and, you know, obviously complicated set of discussions about taxes and spending," said one official.
A U.S. default would mean the country could not borrow additional funds or pay the interest on funds it has already borrowed. Officials did not say how quickly a default would occur if the debt ceiling is reached.
The letter states that a default would also impose a "substantial tax" on Americans by raising all borrowing costs for state and local government, companies and consumers, including an increase in mortgage rates.
"Equity prices and home values would decline, reducing retirement savings and hurting the economic security of all Americans, leading to reductions in spending and investment, which would cause job losses and business failures on a significant scale," it reads.