Treasury unveils plan to buy time under debt ceiling

WASHINGTON (Reuters) - The Treasury on Wednesday announced the first of a series of measures that should push back the day when the government will exceed its legal borrowing authority as imposed by Congress by around two months.

Without any action, Treasury said the government is set to reach its $16.4 trillion debt ceiling on December 31.

The government is facing a crunch on the debt ceiling because the issue has become ensnarled in talks to avoid some $600 billion in tax hikes and spending cuts due to begin in early January. Failing to raise the debt ceiling could cause the government to default on its debt.

To cut government spending and delay bumping up against the debt ceiling, the Treasury will suspend issuance of state and local government series securities -- known as "slugs" -- beginning on December 28.

Investments in a government employee pension fund will also be suspended, along with some other measures, although Treasury did not give dates for when these other measures will begin.

"These extraordinary measures ... can create approximately $200 billion in headroom under the debt limit," Treasury Secretary Timothy Geithner wrote in a letter to congressional leaders.

Normally, these measures would buy the Treasury about two months time before hitting the debt ceiling, Geithner said in the letter. But a series of planned tax hikes and spending cuts due to take effect in early January could give Treasury further time if they take effect as scheduled, he said.

"Treasury will provide more guidance regarding the expected duration of these measures when the policy outlook becomes clearer," he said.

The instruments known as slugs are special low-interest Treasury securities offered to state and local governments to temporarily invest proceeds from municipal bond sales. They have been suspended several times over the last 20 years to avoid hitting the debt ceiling.

Many analysts believe the measures available to the Treasury can stave that date off into late February.

The U.S. Congress typically authorizes government borrowing in a two-stage process, first drafting plans to spend more than it raises in tax revenues. Every few years, it raises a limit on government borrowing to accommodate annual deficits, a process that this year has become ensnared by the contentious budget talks in Washington.

(Reporting by Anna Yukhananov and Jason Lange; additional reporting by Pedro Da Costa; Editing by Leslie Adler)