Corrects sixth paragraph to show that debt owed to Social
Security and Medicare trust funds is subject to debt limit.
Other categories are excluded.
WASHINGTON Jan 23 The U.S. government is on
track to hit its $14.294 trillion statutory debt limit as early
as March 31, and newly emboldened Republican lawmakers intend
to use the need to raise it as leverage for spending cuts.
Financial markets will listen closely to President Barack
Obama's State of the Union address on Tuesday for any clues on
whether he would be willing to strike a deal with Republicans
to cut spending in exchange for a debt limit increase.
A lengthy standoff could lead to worries in markets about a
potential U.S. default.
Following are key questions and answers on the debt limit
and the politics and market forces surrounding it.
WHAT IS THE DEBT LIMIT?
Congress sets a ceiling that limits the amount of public
debt that the Treasury can issue. This authority was first
enacted in 1917 when United States began borrowing heavily to
finance its entry into World War One. The limit was meant to
allow the Treasury discretion to issue large amounts of bonds
more efficiently, while maintaining Congress' broader control
over the federal purse strings.
The debt limit applies to all debt held outside of the
government and many intra-governmental holdings, such as
internal debt owed to the Social Security and Medicare trust
funds. It does not apply to certain categories of debt --
currently totaling $52.6 billion -- including unamortized
discount adjustjments on Treasury bills and zero-coupon bonds
and federal agency debt held by the Federal Financing Bank.
HOW CLOSE ARE WE TO THE LIMIT?
As of Jan. 20, the U.S. national debt stood at $14.004
trillion, just $290 billion below the limit.
The Treasury has estimated that based on recent spending
and revenue trends, the government will hit the limit as early
as March 31. This could stretch out until May 16, depending on
the strength of government tax receipts and economic growth.
Treasury Secretary Timothy Geithner has asked Congress to raise
the limit before the end of March so the government can meet
previous spending commitments made by lawmakers.
WHAT IF CONGRESS FAILS TO ACT AND THE LIMIT IS HIT?
The government would have to stop issuing debt to fund its
day-to-day operations. If it does not have sufficient cash on
hand from other sources, such as tax receipts, it would have to
curtail some activities, including closing government offices.
The government may have to halt payments of federal
benefits, such as Social Security or Medicare, or default by
halting interest payments on Treasury debt. It paid $148.2
billion in interest to bondholders from October through
WHAT WOULD HAPPEN IF THE UNITED STATES DEFAULTED?
Treasury officials have said this would be "catastrophic."
Financial markets could experience severe turmoil. The
government would likely have to deeply cut spending, which
would suck fiscal support away from a still-fragile recovery
and hurt those who depend on federal benefits.
The Treasury, normally a safe haven for investors, may also
be shut out of borrowing in public debt markets for a period,
so it might have to turn to international institutions such as
the International Monetary Fund for assistance.
After the United States is able to resume borrowing,
analysts say it would be punished with sharply higher interest
rates for years to come as a result of losing its top-tier
credit rating. This would in turn cause mortgage rates to rise
and further increase the U.S. debt burden.
ARE REPUBLICANS WILLING TO RISK A DEFAULT?
No. Although a number of Republicans have voiced opposition
to raising the debt limit as a matter of principle, many also
have stressed the importance of ensuring that the United States
meets its financial obligations. House of Representatives
Speaker John Boehner and other House Republican leaders have
acknowledged that the limit will have to be raised. For
details, see [ID:nN06126921]
But Boehner and House Budget Committee Chairman Paul Ryan
have said any vote to increase the ceiling must be paired with
a commitment to lower spending over the long-term. They will be
looking at Obama's proposed budget, to be unveiled in February,
for evidence of spending restraint.
HOW ARE MARKETS VIEWING THE DEBATE AT THE MOMENT?
So far, there has been little sign of worry among buyers of
Treasury debt, with 10-year note US10YT=RR yields a
manageable 3.34 percent. Markets have been through this before,
and are accustomed to a certain level of political rhetoric
before a debt limit increase is approved.
Although yields on long-term debt have climbed a half
percentage point over the last two months, analysts attribute
this to an improved economic outlook, which has led investors
to shift funds to riskier assets, like stocks. But some on Wall
Street fear a prolonged debt limit standoff and failure to make
tough choices to cut deficits could ultimately cause investors
to sell Treasuries and push up yields. [ID:nN06116658]
CAN THE TREASURY DELAY REACHING THE DEBT LIMIT?
Yes. It has several tools to alter its cash flow, but these
measures can only last about eight weeks or so, pushing back
the day of reckoning to mid-July at the latest. Chief among
these are drawing down a $200 billion fund at the Federal
Reserve that was created to finance emergency lending measures
and halting sales of securities to state and local governments.
It can also dip into some government pension funds and the $50
billion Exchange Stabilization Fund. For a Factbox on these
measures, please see [ID:nN04224129]
(Reporting by David Lawder, editing by Maureen Bavdek)