UPDATE 1-U.S. Treasury makes first move to buy time under debt ceiling

Wed May 15, 2013 5:05pm EDT

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WASHINGTON May 15 (Reuters) - The U.S. Treasury on Wednesday announced the first of a potential series of emergency cash measures to allow the government to keep paying the nation's bills once a temporary suspension of the debt ceiling lapses this weekend.

To avoid running out of room to borrow, the Treasury Department said it will suspend issuance of state and local government series securities, known as "slugs", beginning on Friday at noon.

Slugs are low-interest Treasury securities offered to state and local governments to invest proceeds from municipal bond sales. They have been suspended eight times over the last 20 years to avoid hitting the debt ceiling, most recently last December.

Emergency cash maneuvers buy more time for the administration and Congress to negotiate an increase in the legal limit on the nation's debt. Ultimately, an impasse could lead to a debt default that would shake global financial markets.

Republicans in Congress want to use the need to raise the borrowing cap as leverage to seek fresh budget cuts and change the tax code. But President Barack Obama said any deal to cut the budget deficit would need to include additional taxes, an idea that is anathema to many conservatives.

Normally, emergency cash measures would buy the Treasury about two months before it would run out of cash to pay all of its bills. But unexpectedly strong tax receipts and sizable bailout payments from mortgage finance firms Fannie Mae and Freddie Mac should give Treasury more time.

U.S. Treasury Jack Lew had said the government would be able to pay its bills at least into early September.

Many private forecasters believe the drop-dead date will not be reached until October, and the non-partisan Congressional Budget Office estimates it could be as late as November.

In 2011, the Obama administration and Congress battled for months before raising the debt ceiling to $16.4 trillion. The fight hurt consumer confidence and shook financial markets.

Earlier this year, Congress decided to side step a messy political fight and put in place legislation that suspended the legal debt limit. When that suspension expires on Sunday, the new ceiling will be set at the existing level of the nation's debt. As of Tuesday, the public debt subject to a limit stood at $16.7 trillion.

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