The U.S. government hit the $14.3 trillion debt ceiling on Monday, setting in motion a rush to avoid a default.
By pursuing alternative measures, though, the timeframe will likely be extended to Aug. 2 versus last month's estimate of July 8. Priya Misra, head of U.S. Rates Strategy at BofA Merrill Lynch Global Research said in a report released Monday that the Treasury claims better than expected tax receipts enables them to extend the final date by three weeks. This August date is seen in Washington as the "real" deadline, and so the debate is unlikely to reach a conclusion long before then.
In an effort to jumpstart negotiations before then between Democrats and Republicans on the issue of raising the debt limit, Treasury Secretary Timothy Geithner sent a letter to Senate Majority Leader Harry Reid, D-Nev., detailing the steps the Treasury Department is taking to extend payment of government obligations.
Geithner (left) has declared a "debt issuance suspension period" for the Civil Service Retirement and Disability Fund, permitting Treasury to redeem a portion of existing Treasury securities held by that fund as investments and suspend issuance of new Treasury securities to that fund as investments. He also suspended the daily reinvestment of Treasury securities held as investments by the Government Securities Investment Fund of the Federal Employees’ Retirement System Thrift Savings Plan.
“Each of these actions has been taken in the past by my predecessors during previous debt limit impasses,” Geithner wrote. “Federal retirees and employees will be unaffected by these actions. I have written to Congress on previous occasions regarding the importance of timely action to increase the debt limit in order to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens. I again urge Congress to act to increase the statutory debt limit as soon as possible.”
As far as the next steps, Misra believes despite earlier Democratic attempts to separate the issues, debt ceiling legislation will probably have to be attached to a broader deficit reduction bill. The exact specifications of the larger deficit reduction measure will be the focus of intense debate in coming weeks.
She writes there may be two phases in this debate.
“The first phase could focus on various long-term budget proposals with Republicans generally calling for reduced government spending in the politically charged areas of health care and entitlement spending (similar to the Ryan plan) and Democrats focusing more on discretionary spending reductions (education, transit, research, arts) and increased taxes for high income individuals (similar to the plan announced by President Obama recently).”
Under current policy, she notes, the cumulative deficit over the next 10 years could add about $9.5 trillion to government debt outstanding. The so-called Gang of Six, a bipartisan group of senators, is expected to release a proposal to reduce this cumulative deficit by $4 trillion over 10 years.
Vice President Joe Biden began bipartisan negotiations on May 5 to come up with a plan by the end of June for comprehensive debt reduction. Existing proposals from Paul Ryan, the White House, and the Deficit Commission seek cumulative reductions of $3 trillion to $4 trillion over a 10-12 year period. But because of the political disagreement over major issues such as taxes and Medicare, it would be surprising to see any of these proposals voted into law before July.
As a result, the conversation is likely to shift to phase two: how to agree on raising the debt ceiling before July, possibly in a series of small steps, depending on certain budgetary goals over a specified timeline, to ensure that the government continues to perform on its financial obligations while a larger fiscal package is negotiated. But even on this front there is disagreement, she adds, making a debt ceiling extension far from a done deal.