UPDATE 2-U.S. Treasury starts maneuvering on debt limit

Thu Jan 27, 2011 1:21pm EST

  
 * Treasury takes action to stave off hitting debt limit
 * Political battle intensifying over spending, borrowing
 * U.S. budget position worsening after tax cut extension
 (recasts first paragraph, adds details, background)
 By Glenn Somerville
 WASHINGTON, Jan 27 (Reuters) - The U.S. Treasury on
Thursday initiated the first in what is likely be a series of
maneuvers aimed at preventing it from hitting a legal debt
limit as a political battle over spending intensified.
 The action to reduce the amount of money the Treasury holds
in a special account at the Federal Reserve marked only a small
step in freeing up new borrowing capacity, but was symbolically
important as the Obama administration and Republican lawmakers
stake out ground in a wider budget debate.
 As of Tuesday, Treasury's remaining borrowing authority was
down to $279 billion -- all that remained before it bumps
against a legally set $14.294 trillion debt ceiling.
 That is little more than a drop in the bucket for a
government that relies on borrowing to finance day-to-day costs
for everything from running the war in Afghanistan to cutting
Social Security checks for retirees.
 Treasury Secretary Timothy Geithner warned Congress earlier
this month the debt limit could be reached as soon as March 31
or as late as May 16, depending on how the economy performs and
how much flows into Treasury's coffers by an April 15 tax
deadline.
 'CATASTROPHE' ON HORIZON?
 Failure to lift the ceiling could precipitate default and
have "catastrophic" economic consequences, Geithner warned.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For a Factbox on further steps Treasury could take, see
[ID:nN27175617]
For questions and answers on the debt limit, see
[ID:nN23293385]
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 Treasury gained limited ground through Thursday's action,
which officials said was already factored into Geithner's
estimate of when the debt ceiling will be reached.
 Beginning on Feb. 3, it will gradually cut the balance in
the Supplementary Financing Program to $5 billion from $200
billion. It can do so by letting short-term bills that finance
it mature and not issuing new ones.
 Under the program, which was set up in September 2008 at
the peak of the financial crisis, the Treasury sold short-term
bills and turned the proceeds over to the Fed to help manage
its balance sheet while the central bank propped up a faltering
banking system.
 Republicans are seeking to use the need to raise the
nation's borrowing capacity as leverage to exact spending cuts
from the Obama administration and Democratic lawmakers. A call
to slow government spending helped Republicans seize control of
the House of Representatives in November's elections.
 House Majority Leader Eric Cantor said on Sunday that
Republicans would not back an increase in the limit "unless
there are serious spending cuts and reforms." He said all
spending should be on the table, including for the Pentagon.
 GETTING WORSE, NOT BETTER
 That position may harden after the latest signs that
government finances are deteriorating rather than improving.
 The nonpartisan Congressional Budget Office on Wednesday
said the budget deficit will soar nearly 40 percent to a record
$1.48 trillion this fiscal year, largely because of a tax-cut
package engineered by President Barack Obama and Republican
lawmakers last month.
 Geithner has said the United States intends to get its
deficits under control, while defending past decisions to pump
money into the economy to counter the 2007-2009 financial
crisis.
 The International Monetary Fund on Thursday warned that
investors won't remain complacent forever and that a U.S.
budget-cutting plan was needed soon to keep borrowing costs
tamped down.
 "In advanced economies where fiscal sustainability has not
been a market concern, credible plans going well beyond 2011
need to be put in place urgently to lock in benevolent market
sentiment," it said. [ID:nN27161289]
 While the Treasury still has multiple steps it can take to
ward off bumping the debt ceiling, eventually the issue will
either come to a head that will either force lawmakers to
acquiesce to another hike or the Obama administration to
bargain for one.
 A standoff would only heighten financial market worries
that the United States could be pushed into a default -- an
unlikely result and one that has never happened in the
country's history.
 (Reporting by Glenn Somerville; Editing by Andrew Hay)


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