SLGS at Risk Without Debt Limit Bill

WASHINGTON — If Congress does not pass legislation boosting the federal debt limit by the end of the year, the Treasury Department could be forced to close its window for state and local government series securities, which municipal issuers purchase for refunding escrows to avoid earning arbitrage, market sources said yesterday.

Treasury officials contend the government is likely to bump up against the current debt limit of $12.1 trillion before the end of the year. The federal government had $12.079 trillion of public debt outstanding as of Dec. 9, according to a spokesperson at the Treasury’s Bureau of Public Debt.

House Majority Leader Steny Hoyer, D-Md., said Friday that the debt limit will have to be increased by $1.8 trillion to $1.9 trillion for the government to borrow enough money to fund its operations through December 2010. Refusing to act on the debt limit is “not an option,” he added.

Hoyer said House leaders will attach the debt limit provision to the fiscal 2010 defense spending bill that is to be voted on next week.

To win over conservative Blue Dog Democrats in the House that are wary of increasing government spending, the bill will also include a provision that would re-institute the pay-as-you-go budgetary rules for new measures, he said.

Sources say the Democrats are particularly anxious to increase the limit this year because next year will be a significant election year.

Republicans, however, said Friday that they are opposed to raising the debt limit and will vote against any bill containing such a provision.

When the Treasury’s debt issuances come close to the limit, it typically shuts down the SLGS window as one of its first actions.

“They’re basically nonmarket securities ... so those are the least disruptive to shut down,” said Linda Schakel, a partner with Ballard Spahr LLP.

Although advance refundings were down this year compared to last year, SLGS sales are relatively flat over the same time frame, Matt Fabian, managing director of Municipal Market Advisors, said Friday.

The numbers for SLGS issuance in 2009 was about the same as for 2008, but both fall well below prior years, he said.

SLGS issuance is down 0.2% from the same time last year, as a total of $63 billion have been sold, compared to $63.11 billion in 2008, Fabian said.

“What’s stopping more refunding sales this year is the steepness of the Treasury yield curve, so assuming the debt window closes, the downside is limited,” he said. “If the Treasury curve begins to flatten, meaning higher yields at earlier maturities, there would be more refundings and the closure of the debt window more of a pain.”

The House and Senate earlier this year approved a budget resolution to raise the debt cap to $13.2 trillion in fiscal 2010, then increase it by about $100 billion per year until it reaches $17 trillion in fiscal 2014. However, the resolution was not binding and Congress must enact a law to increase the limit.

Congress last increased the debt limit in January, after analysts from the Congressional Budget Office warned the limit at that time of $11.315 trillion would be exceeded by the spring.

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