Saturday, November 14, 2009

U.S. Treasury Confident Congress Will Increase Debt Ceiling

By Rebecca Christie

Nov. 13 (Bloomberg) -- The Obama administration is confident Congress will raise the country's debt limit by year end to avert a showdown similar to the one that shuttered parts of the government in 1995, administration officials said.

The White House wants an increase of at least $1 trillion to $1.5 trillion, according to a person familiar with the deliberations between lawmakers and the administration. Record budget deficits are pushing the national debt closer to the $12.1 trillion statutory limit.

The administration's request, higher than a proposed increase already passed in the House of Representatives, would get the government through the November 2010 midterm congressional elections without needing another increase. Earlier this month, Treasury officials acknowledged they'll need more borrowing room by year-end to avoid market disruptions.

"Market participants still remain on edge, especially since many have concerns over the rising debt loads that were kicked off this year," said George Goncalves, chief fixed- income rates strategist in New York at primary dealer Cantor Fitzgerald LP.

The administration officials said the White House is open to any legislative vehicle that will raise the debt limit, by any amount. Although the Obama administration has pledged to bring deficits down to "sustainable" levels in the longer term, Treasury Secretary Timothy Geithner has focused recently on the need to keep up spending on economic assistance programs until the unemployment rate, which reached a 26-year high of 10.2 percent in October, comes down.

TARP Savings

To rein in the 2010 deficit, the administration will save as much as it can from unused portions of the $700 billion Troubled Asset Relief Program, another administration official said. Treasury data show that the administration has more than $200 billion in uncommitted TARP funds.

One Treasury official said the memory of the 1995 budget standoff should be motivation to avoid another showdown. In that confrontation, then-House Speaker Newt Gingrich battled with the White House over federal budget bills, forcing President Bill Clinton to shut the government down temporarily.

With the economy still in the early recovery stage, Congress understands the stakes and doesn't want to fuel investor concern, the official said.

Republicans in Congress are seeking to link the debt limit to the debate over health-care spending, while Democrats prefer to keep the two issues separate. The Senate Budget Committee has proposed a commission to look into the nation's fiscal health, which backers say should be a condition of any debt limit increase.

'Not Right'

"We're seeing deficits projected for the next 10 years of over a trillion dollars a year," said Senator Judd Gregg of New Hampshire, the ranking Republican on the Budget Committee, in congressional comments last week. "It's not sustainable. It's not fair, and it's not right."

Treasury debt-management director Karthik Ramanathan told bond market participants in Washington last week to expect another year of government debt sales of $1.5 trillion to $2 trillion in fiscal year 2010, which began Oct. 1, according to minutes of the meeting.

For fiscal year 2009, which ended Sept. 30, the U.S. racked up a $1.4 trillion deficit, and the Congressional Budget Office in August predicted a deficit this year of about the same size.

Treasury officials also have said they have less maneuvering room than in the past. Tactics such as tapping federal retirement funds would free up roughly $150 billion - about the same amount as the interest payments that come due on Dec. 31.

Temporary Measures

"Depending on the date that we hit the debt limit, they could last days or at most weeks," compared with five or six months in previous debt-limit impasses, said Matthew Rutherford, deputy assistant Treasury secretary for federal finance, in a press conference last week.

Forecasting a precise date for a debt-ceiling collision is difficult because the government's cash flows are "volatile," the Treasury said last week, adding that it would keep markets and lawmakers notified of developments. The department said it could need extra immediate cash because there's so much uncertainty surrounding incoming taxes and outgoing spending on fiscal stimulus and financial market stabilization programs.

"Debt ceiling showdowns used to be long, drawn-out affairs," said Louis Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey. "Things come to a head much faster when your cash burn rate averages more than $100 billion a month."

To contact the reporter on this story: Rebecca Christie in Washington at

Last Updated: November 13, 2009 00:01 EST

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