Factbox: Treasury's tools to delay hitting debt limit

Thu Jan 27, 2011 11:15am EST

(Reuters) - The U.S. Treasury on Thursday announced its first step to avoid breaching the government's $14.294 trillion borrowing limit, saying it would shrink the amount of money it has on deposit at the Federal Reserve.

Beginning February 3, Treasury will gradually decrease the balance in its so-called Supplementary Financing Program (SFP) -- a $200 billion Fed deposit that was created during the financial crisis to fund emergency lending.

It has said the statutory debt ceiling would be reached as early as March 31 or as late as May 16, depending on the economy and the strength of tax receipts.

Although Congress routinely raises the debt limit every year, Republicans have threatened not to unless the administration and Democrats vow to cut spending.

As of January 25, total public U.S. debt stood at $14.015 trillion, $279 billion below the limit. The Treasury has forecast that it will borrow $431 billion in net marketable debt in the January-March period.

In addition to shrinking the SFP, the Treasury has a number of other tools at its disposal to delay hitting the debt ceiling. Officials have said they could push back the date the ceiling will be reached by about eight weeks by employing special measures.

Following is a rundown of other steps the Treasury could take and other factors affecting the debt limit.

ISSUE MORE CASH MANAGEMENT BILLS

The Treasury could cut issuance of longer-term government debt and rely more heavily on short-term cash management bills to gain more day-to-day control over debt outstanding. Cash management bills are typically issued for days instead of normal Treasury bill maturities of four weeks to one year. However, officials are likely to be wary of making major shifts in the Treasury's debt issuance calendar, which could upset markets.

SUSPEND STATE AND LOCAL GOVERNMENT SECURITIES

The Treasury could suspend sales of State and Local Government Series securities, known as "slugs," which are special low interest-bearing Treasury securities offered to local governments and other tax-exempt entities for the investment of municipal bond-issue proceeds. Slugs, which count against the debt limit, were last halted in September 2007 to avoid hitting the ceiling then. During the first three months of fiscal 2011, which began October 1, the Treasury had sold $29.9 billion in slugs to muni bond issuers.

CIVIL SERVICE RETIREMENT AND FUND

As it has in the past, the Treasury could suspend payments to the Civil Service Retirement and Disability Fund, a government employee pension fund. The government has recently been contributing an average of $5.8 billion to this fund per month. It would be required to replace any missed contributions and lost earnings.

EXCHANGE STABILIZATION FUND

The Treasury could dip into this seldom-used $50 billion fund earmarked to stabilize currency rates. Created during the Great Depression of the 1930s, the fund was last used as a backstop to guarantee money market mutual funds during the worst part of the financial crisis from September 2008 to September 2009.

GOVERNMENT SECURITIES INVESTMENT FUND

To free up cash, the Treasury can halt reinvestments of another federal employee pension fund known as the G-Fund, which had net assets of $118 billion at the end of 2009 invested in special short term Treasury securities with maturities of one to four days. Normally, maturing assets in the G-Fund are reinvested daily. But the Treasury has statutory authority to retain a portion of the fund, as long as it provides proper notification and reimbursement for any lost earnings from the move.

ACCELERATE SALES OF TARP INVESTMENTS

The government could raise money by selling off chunks of companies it bought under its $700 billion bailout Troubled Asset Relief Program (TARP) fund.

The Treasury is planning a stock offering in bailed out insurance company American International Group Inc (AIG.N) in the March to May period that is expected to top $15 billion.

Taxpayers now own about 1.66 billion AIG common shares, valued at around $71.2 billion at current market prices and hold interests in AIG subsidiaries and other assets valued at around $20 billion. Treasury officials have said a stock offering could be increased if market conditions are favorable.

The Treasury also anticipates IPOs this year in lender Ally Financial and automaker Chrysler Holdings. It can resume selling General Motors (GM.N) shares after a lock-up agreement expires in May. An improved economy could prompt banks to repay more of the $34.4 billion in government capital that remains outstanding.

SELL FANNIE/FREDDIE MBS

The Treasury could sell down its holdings of mortgage-backed securities bought from Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) during the financial crisis. It held $161.54 billion of these at the end of November. On the other hand, the Treasury is still on the hook for losses that Fannie and Freddie suffer. Further declines in home prices could increase their capital draw on Treasury resources.

HOPE FOR HIGHER TAX RECEIPTS

The Treasury also could stave off its debt limit reckoning if tax receipts come in higher than expected due to stronger economic growth. Receipts in the first three months of fiscal 2011 were up 9.0 percent -- a $44 billion increase -- versus the same year-earlier period. That compares to an anemic 2.7 percent gain in fiscal 2010, which ended September 30. Stronger economic growth, increased employment and a rising stock market would produce more income, reducing the need to fund government operations with debt.

( Reporting by David Lawder, Editing by W Simon )

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