BPC: U.S. Likely to Reach Debt Limit Sooner Than Thought

The federal government may be unable to meet all of its spending obligations as soon as mid-February, with potentially disastrous consequences for markets and the economy, unless the debt ceiling is raised, the Bipartisan Policy Center concludes in an analysis released Monday.

The analysis comes after Treasury Secretary Timothy Geithner warned Congress the day after Christmas that the U.S. would reach its current $16.394 trillion debt limit on Dec. 31, but said Treasury would begin to take a series of extraordinary measures to postpone hitting the ceiling for about two months. Those measures included halting sales of State and Local Government Series securities (SLGS), which muni issuers purchase for advance refunding escrows to avoid breaching yield restriction requirements.

But BPC said the debt limit day of reckoning may come sooner than people think.

“Based on financial data from Treasury, we estimate that the government will be unable to pay all of its bills as early as Feb. 15, also known as the X Date,” said Steve Bell, senior director of the economic policy project at BPC. “Our numbers show that we have less time to solve this problem than many realize. We estimate that Treasury will exhaust its borrowing authority and no longer have sufficient funds to meet its obligations in full and on time at some point between Feb. 15 and March 1.”

“It will be difficult for Treasury to get beyond the March 1 date in our judgment,” he added.

BPC projects the federal government will have a negative operating of cash flow of about $175 billion between Feb. 15 and March 1. About $452 billion in scheduled payments are due during that period, including Internal Revenue Service tax refunds for individuals, interest payments on Treasuries, as well as Medicare, Medicare and Social Security benefits.

At the same time, the federal government’s projected revenue totals only $277 billion for that period, BPC said.

Bell said that if the country reaches X Date, then Treasury may be forced to prioritize payments, but that this may not even be feasible since the payment process is computerized.

“If we reach the X Date and Treasury is forced to prioritize payments, handling payments for many important and popular programs will quickly become impossible, causing disruption to an already fragile economic recovery,” he said.

Treasury also must roll over about $500 billion of debt that matures during the Feb. 15 to March 1 time frame, BPC said.

The adverse impact on taxpayers and the markets could be significant, according to BPC.

The Treasury may have to pay higher interest rates to attract new buyers of U.S. debt. It is possible, if unlikely, that Treasury would not find enough bidders for debt offerings, the group said.

Additional rating agency downgrades are possible. Standard and Poor’s downgraded U.S. debt last summer.

In addition, there could be negative reactions from Treasury and other markets that hurt the U.S. economy and have domino effects on the global financial system, the group warned said.

BPC pointed out that the Government Accountability Office found in a previously issued report that there were substantial additional costs to taxpayers as a result of the delayed 2011 debt limit increase. The group said that, using GAO’s methodology and extending it to analyze long-term costs, the 10-year cost to taxpayers of the 2011 debt limit standoff was about $18.9 billion.

A debt limit increase of $1.1 trillion would be needed to fully fund the government through the end of 2013 and another $1 trillion through the end of 2014, BPC said.

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