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Bumping its head on the ceiling - the US Treasury and extraordinary measures.

The US Government debt ceiling is currently suspended, but will be re-instated on 8 February 2014 (Saturday). When the debt ceiling is reached, the US Treasury will once again face a situation where it has two conflicting objectives – to honour the US Government’s financial commitments, and to not issue new debt. A small number of ‘extraordinary measures’ can be used in the short term, but they aren’t sustainable solutions. The temporary ‘headroom’ they provide below the debt ceiling will likely only last until June at the latest, and possibly much less. Even the potential for default has an impact on borrowing costs, and the US Treasury said ‘A default would be unprecedented and has the potential to be catastrophic’.

On 16 October 2013 the United States Congress passed legislation to end the Government shutdown and temporarily remove the debt ceiling (the Continuing Appropriations Act, 2014). The debt ceiling is a legislative restriction that does not limit spending, but restricts the US Treasury’s ability to borrow (see this Flagpost for more background). On 8 February the debt ceiling will be re-instated at a higher level (to match the additional debt issued while the ceiling was suspended, but no higher). 

If Congress does not vote to raise the debt ceiling, the US Treasury will have two conflicting obligations – paying the bills, and not borrowing. In recent comments the US Treasury Secretary noted, ‘Even though the House and Senate approved a budget … they did not yet provide the borrowing authority to pay for the spending commitments they made’. 

In the short term, the US Treasury can resort to ‘extraordinary measures’. These are strategies (legal, and used previously when the debt ceiling was reached) that postpone default for a short period, but aren’t sustainable solutions. 

• The US Treasury can stop re-investing the earnings of specific government retirement funds. The US Treasury has the authority to not re-invest earnings from (or contributions to) two retirement funds - the 'G Fund', and the Civil Service Retirement and Disability Trust Fund. Once the debt ceiling is lifted the funds must be repaid in full, to restore them to the position they would have otherwise been in (including interest earnings). These measures are expected to provide about $170 billion in headroom under the debt ceiling.
• The US Treasury can use assets in the Exchange Settlement Fund (approximately $20 billion in headroom).
• The US Treasury Secretary also recently announced that the sale of State and Local Government Series (SLGS) securities would be suspended. These securities are issued by the US Treasury to help state and local governments comply with tax regulations; the suspension may cause some disruption for those organisations.
• Other measures have been used previously, including swapping US Treasury debt for debt issued by the Federal Financing Bank (which can issue up to US$15 billion of debt that is exempt from the debt limit). A range of factors mean that these measures are less useful in this situation. 

These extraordinary measures provide a short term solution to enable the US Treasury to continue paying its bills, although how long they will last is uncertain. In the long run the deficit run by the US Government (higher expenses than revenue) means that new debt needs to be issued. Material from the US Treasury, US Congressional Research Service, the US Congress Government Accountability Office, and the Bipartisan Policy Analyis Centre provides more detail on extraordinary measures used in previous situations when the debt ceiling was reached.
Chart data from: The US Treasury Monthly Statement of Public Debt.