The Department of the Treasury is fast approaching the nearly $7.4 trillion legal limit on its debt placed by Congress, and will soon suspend issuance of State and Local Government Series (SLGS) and fall back on creative accounting to continue government funding. The suspension of the SLGS issuance will drive state and local governments to other Treasury products to fund their issuances, according to Joe Shatz, senior government strategist at Merrill Lynch. The increased demand for Treasuries, especially Separate Trading of Registered Interest and Principal of Securities (STRIPS), would cause the '05 to '14 STRIPS to richen, he said.
Breaching the debt ceiling would result in the U.S. government defaulting on its debt. To avoid this catastrophic result, the Treasury is expected to suspend SLGS issuance, which could happen any day now, according to Lou Crandall, chief economist of Wrightson ICAP, a bond market research firm. SLGS are securities sold by the Treasury to municipal bond issuers, which help them comply with tax codes.
As of Oct. 6, the U.S. public debt stood at $7.375 trillion, $9 billion away from the limit, which the Treasury expects to reach sometime this month, according to Rob Nichols, spokesman at the Treasury.
The Treasury will also resort to the accounting tricks it used when it came up against the debt ceiling in 2003. One method is to free up borrowing authority by retiring $15 billion in debt, funded by issuances from the Federal Financing Bank, an internal operation that allows executive branch agencies to borrow through the Treasury. Another method is to take money out of the Exchange Stabilization Fund and put it into an account not subject to the debt limit. The third option involves stopping payments into the Government Securities Investment Fund, which would also give it more borrowing authority.
