05/20/2013 08:47 pm ET Updated Jul 20, 2013

Treasury Takes Debt Limit Actions

May 20 (Reuters) - U.S. Treasury Secretary Jack Lew on Monday said the Obama administration was suspending investments in the Civil Service Retirement and Disability Fund, a government employee pension fund, to help the nation keep paying its bills now that a temporary suspension of the cap on the government's debt has expired.

In a letter to leaders of Congress, Lew said the department also would redeem a portion of the investments held by the fund. The suspension goes through Aug. 2 and the Treasury Department expects the move will free up $19 billion in headroom under the debt limit, a separate fact sheet said.

Investments in another fund, the Postal Service Retiree Health Benefits Fund, will also be suspended, but both funds must be made whole once the debt limit is increased, Lew's letter to Congress said. It said that federal retirees and employees would be unaffected by the move.

The steps were part of extraordinary actions Treasury said last Friday it was willing to take to help avoid a default. Lew said then that the measures taken together would free up about $260 billion and allow the government to avoid defaulting on any of its obligations until at least early September.

Many private analysts have said the Treasury was not likely to run out of options until sometime in October, while the non-partisan Congressional Budget Office has said the government might not exhaust its emergency measures until November.

Following are other measures the Treasury has either employed, is prepared to employ or has ruled out using to free up borrowing capacity and conserve cash after the temporary suspension expired on May 19.


The Treasury on Friday suspended sales of State and Local Government Series securities - known as "slugs" - which are special low-interest Treasury securities offered to state and local governments to temporarily invest proceeds from municipal bond sales. Slugs, which count against the debt limit, have been suspended several times over the last 20 years to avoid hitting the debt ceiling. Taking this action allows Treasury to issue less debt. The bonds account for about $4 billion to $17 billion of the government's debt issuance per month.


The Treasury said it may suspend reinvestments in another federal employee pension fund known as the G-Fund. Normally this money market-like retirement fund reinvests its entire balance daily into special-issue Treasury securities that count against the debt limit. Halting reinvestments would instantly claw back some borrowing capacity but the Treasury must replenish the fund with any lost earnings once a debt limit impasse ends. Federal retirees and employees would be unaffected by this action.


The Treasury said it could dip into this seldom-used fund earmarked to stabilize currency rates and access the dollar balance to avoid debt issuance. Created during the Great Depression to contribute to exchange rate stability, the fund was used in March 2011 when Group of Seven nations intervened to halt a surge in the yen after Japan was struck by an earthquake. It was also employed as a backstop to guarantee money market mutual funds during the financial crisis from September 2008 to September 2009. The Treasury would not have to restore lost interest earnings to the fund.


One option the Treasury did not mention is the possibility of cutting issuance of longer-term government debt in favor of heavier reliance on short-term cash management bills to gain more day-to-day control over debt outstanding. Cash management bills are typically issued for days, compared to normal Treasury bill maturities of four weeks to one year. However, this is unlikely to buy much time and officials are wary of making any major shifts in the Treasury's debt issuance calendar, which could upset markets.


Treasury secretaries in the past have halted sales of U.S. savings bonds to the public during debt limit impasses, but the Treasury said that this would be of little or no benefit as it would not free up borrowing authority and would only prevent small amounts of new debt from being issued.


The Federal Financing Bank can issue up to $15 billion in debt on behalf of other government agencies that is not subject to the debt limit. So the Treasury could exchange FFB debt for other debt to reduce the total amount subject to the limit. However, the Treasury said it was not electing to use this measure as it was of little use. (Compiled by Reuters Washington economics team; Editing by Andrew Hay, James Dalgleish and Eric Beech)



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