US reaches debt limit: What comes next?

US government has reached the debt limit set by Congress, Treasury's Tim Geithner said Monday. Treasury has ways to keep paying the nation's bills until August. All eyes are now on Congress.

By , Staff writer

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    Treasury Secretary Timothy Geithner departs the Blair House in Washington, on Thursday, May 12, after a meeting on the legislative framework for deficit reduction.
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Total US government debt reached the $14.29 trillion limit set by Congress, forcing the Treasury to take extraordinary measures to keep paying the nation's bills, Treasury Secretary Tim Geithner said Monday.

The event didn't catch the Treasury or Congress by surprise: Mr. Geithner has warned for months that Treasury borrowing was nearing the cap. But it does guarantee that wrangling will intensify in the weeks and months ahead over the terms under which Congress will raise the limit to allow more borrowing.

The challenge is that, with rising national debt a big worry both for voters and financial markets, it's hard for Congress to agree on a path forward. Many Republicans argue that steep curbs on federal spending must be part of any legislation to raise the debt ceiling.

Recommended: Debt ceiling 101: 12 questions about what's going on

Geithner declared a "debt issuance suspension period" for the Civil Service Retirement and Disability Fund, a move that allows the Treasury to gain some headroom by redeeming Treasury securities held by the retirement fund, and to stop issuing new Treasury securities to the fund as investments for the time being. Similarly, he suspended reinvestment of Treasury securities held in the so-called G-fund, a money-market fund for federal government employees.

The moves amount to temporary gimmicks, since eventually the Treasury will have to play catch-up in funding those programs. But the tactics will allow federal operations to continue as usual until early August, the Treasury estimates. That amounts to an implied deadline for Congress to raise the limit, most finance experts say.

"I want to again encourage Congress to move as quickly as possible," Geithner said in a public appearance Friday, "so that all Americans will remain confident that the United States will meet all of its obligations – not just our interest payments but also our commitments to our seniors."

Is hitting the debt limit a bad thing?

The answers differ.

Many in Congress have viewed the limit, which is raised periodically over the years, as a tool for bringing America's debt problems into public focus. Hitting the limit provides a moment when, under the light of TV news crews, elected officials ponder the consequences of annual budget deficits and perhaps enact fiscal reforms.

The high-stakes debt-ceiling debate is one reason Vice President Joe Biden has been meeting recently with congressional leaders to seek common ground on fiscal policy.

One thing the cap doesn't do, however, is automatically reduce federal spending or balance the federal books. In recent polls, Americans have said they don't want the debt limit to be raised. But Congress has authorized spending that exceeds the government's tax revenues. And many voters resist the idea of either deep cuts in existing federal programs or higher taxes.

Until that equation changes, the Treasury will have to borrow money – and being up against the debt ceiling is an obstacle to doing that.

Moreover, many finance experts warn that even approaching the brink of default on Treasury debt could have serious consequences. Investors, they say, could start viewing Treasury bonds less as a "risk free" haven and more like any other investment. The result could be a weaker US dollar and higher interest rates, not just for federal borrowing but also for everything from mortgages to business loans.

"At the present time, financial markets are not spooked, there is relative calm," economist Asha Bangalore of the Northern Trust Co. wrote in a Friday analysis. "As the August deadline approaches, uncertainty would translate into significant financial market volatility."

If Congress refused to raise the limit, the Treasury Department "would have to operate on a cash flow basis and may have to prioritize its payments," Ms. Bangalore said.

Many political conservatives argue that talk of a US debt default is overblown. The Treasury would, presumably, put highest priority on avoiding missed payments to creditors. And the showdown can provide the impetus for a needed downsizing of federal programs, say critics of big government.

But without the authority to borrow, the Treasury secretary knows that incoming cash would cover less than two-thirds of federal spending at current rates. The Treasury's options could quickly get tough, going beyond things like furloughing federal employees deemed nonessential. Even many supporters of big spending cuts say the ceiling on debt should be raised, as long as the move is paired with mechanisms to ensure new reins on the federal budget.

"Without significant spending cuts and changes in the way we spend the American people’s money, there will be no increase in the debt limit," House Speaker John Boehner (R) of Ohio said last week.

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