Geithner Warns Congress of Crisis Without Debt Action

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The Wall Street Journal
By: Damian Paletta
April 5, 2011

Without congressional action, the federal government will hit its legal borrowing limit no later than May 16 and could default on its debt by July 8, the Obama administration said Tuesday.

The warning came in a nine-page letter from Treasury Secretary Timothy Geithner that marked the administration's most detailed plea to Congress to raise the $14.294 trillion debt ceiling.

Failure to act could trigger "a financial crisis potentially more severe than the crisis from which we are only now starting to recover," said Mr. Geithner.

Among other things, the government could have to stop or delay paying government salaries and halt Social Security and Medicare benefits. The impact could also reach financial markets and the operations of major corporations.

The Treasury had a record $14.218 trillion in debt as of March 31.

In January, Mr. Geithner pleaded with Congress to raise the ceiling by the end of March, but Congress hasn't moved to address the issue because of a split between Republicans and Democrats over how to proceed.

Many Republicans have flatly said they wouldn't vote to increase the debt ceiling, with others saying they would only vote for an increase if it was coupled with significant spending cuts.

"Speaker Boehner has been perfectly clear: The American people will not tolerate an increase in the debt ceiling without serious spending cuts and real reforms to make sure we keep cutting spending," said Michael Steel, a spokesman for Speaker of the House John Boehner (R., Ohio).

The White House and many Democrats have said the debt-ceiling deliberations should be handled separately from any broader debate about federal spending, in part because U.S. debt includes interest on money the government has already spent and is akin to paying interest on an existing credit-card balance.

"It is critical that Congress act to increase the debt limit so that the full faith and credit of the United States is protected," Mr. Geithner wrote in his letter Monday.

Federal Reserve Chairman Ben Bernanke has said the consequences would be "catastrophic" if the ceiling isn't raised and the U.S. defaulted on its debt. Mr. Geithner said in his letter such an action would be "unthinkable."

Hitting the ceiling would make it much harder for the government to fund its operations and do things like pay interest on its debt. The government would likely face soaring borrowing costs as spooked investors demanded higher returns on government debt.

Because the interest rates on many private loans are linked to Treasury yields, rates on mortgages and corporate borrowing could surge as well. Financial-market operations could be disrupted because Treasuries are used as collateral for many kinds of borrowing, such as the short-term loans big banks take to finance their operations. If those credit markets seized up, some companies might not have enough cash to make payrolls.

Treasury officials have spent months creating emergency plans they believe would free up an additional $165 billion in head room under the limit in case Congress delays any action. Mr. Geithner said it wasn't a "viable option" to have Treasury move to sell financial assets, such as government gold, to delay congressional action.

He said this "would be damaging to financial markets and the economy and would undermine confidence in the United States."

Instead, the Treasury would most likely draw down funds set aside for emergency lending, suspend the sales of state and local government securities, and suspend payments into federal employee pension funds.

These moves might buy the government just eight weeks of time--until about July 8--before it ultimately defaulted.

"It would be tough making it past June 30," said Vincent Reinhart, former director of the Federal Reserve's division of monetary affairs. Unless Congress raises the debt ceiling, "come August, they are toast."

Write to Damian Paletta at damian.paletta@wsj.com

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