How to delay a national default in 3 steps

Treasury Department Treasury Department Jacquelyn Martin/AP

So how does a country that can’t borrow anymore stave off default? Mostly, it needs to just stop investing in things.

Treasury Secretary Timothy Geithner told Senate Majority Leader Harry Reid, D-Nev., in a letter this week that the nation will reach its debt limit—a cap on how much it can borrow—on Monday, unless Congress takes action to raise the limit. But, he said, the agency will be able to delay a default by employing so-called “extraordinary measures.” 

Under normal circumstances, America's debt grows by about $100 billion a month. The extraordinary measures Geithner proposes, all of which have been used before, would free up about $200 billion. Still, he warned that policy uncertainty surrounding the tax hikes and spending cuts that comprise the year-end fiscal cliff make it difficult to predict how long the country has.

What is clear is that the extraordinary steps will at least buy the country some time. Here’s how the world’s largest economy will avert a default, in three steps:

1. Stop Replenishing Government Funds

Many of the steps Treasury will take hinge on temporarily halting reinvestment in certain government funds.

Take the Government Securities Investment Fund, one of five individual investment funds that make up the Thrift Savings Plan, a 401(k)-like federal retirement plan. The G Fund is made up of Treasury securities with a short lifespan of just one day. When they mature daily, they are typically reinvested. But, when the debt limit is reached, Treasury can choose not to reinvest. As a result, the department can almost immediately free up approximately $156 billion, according to Geithner’s letter. Treasury must replenish the fund once the debt ceiling is raised, so individuals who contribute to the plan will be unaffected as long as the limit is raised before the measure is exhausted.

The government also maintains the Exchange Stabilization Fund, which trades foreign currency to promote exchange-rate stability. The dollar portion of that fund is similarly invested in Treasury securities that mature daily. So Treasury could quickly pull its investments in the ESF, freeing up $23 billion.

Treasury is also allowed to stop investments to two federal-employee benefit programs, freeing up$16 billion from the Civil Service Retirement and Disability Fund and $1 billion from the Postal Service Retiree Health Benefits Fund. The one-off suspension of investment in these two funds, however, can only be done on Dec. 31, according to Geithner’s letter.

2. Temporarily Dip Into Benefits Funds

It’s not just new investments that Treasury has authority over in a debt-ceiling impasse. The department can also disinvest from the aforementioned CSRDF federal-employee benefits program by cashing in early on the Treasury securities that fund holds. That would make about $12 billion available over two months, according to Geithner’s letter. Such a move would not affect employees and retirees because the fund would have to be made whole once the debt ceiling is raised again, according to the letter.

3. Halt a “Safe Harbor” Program for Local Government Debt

Local governments often borrow money for large projects—the construction of new roads, purchases of heavy equipment, etc.—by issuing bonds. But they typically need somewhere to put the money they raise until it’s time to spend it. Enter Treasury. Forty years ago, the Department launched the State and Local Government Series securities program. This gives local governments what theCongressional Research Service calls a “safe harbor” in which to park that money.

The program issues anywhere between $4 billion and $17 billion of such securities a month, though even that range is subject to big monthly swings. Unlike the other measures, this one doesn’t free up money. It simply eliminates one driver of the debt.

Stay up-to-date with federal news alerts and analysis — Sign up for GovExec's email newsletters.
FROM OUR SPONSORS
JOIN THE DISCUSSION
Close [ x ] More from GovExec
 
 

Thank you for subscribing to newsletters from GovExec.com.
We think these reports might interest you:

  • Sponsored by Brocade

    Best of 2016 Federal Forum eBook

    Earlier this summer, Federal and tech industry leaders convened to talk security, machine learning, network modernization, DevOps, and much more at the 2016 Federal Forum. This eBook includes a useful summary highlighting the best content shared at the 2016 Federal Forum to help agencies modernize their network infrastructure.

    Download
  • Sponsored by CDW-G

    GBC Flash Poll Series: Merger & Acquisitions

    Download this GBC Flash Poll to learn more about federal perspectives on the impact of industry consolidation.

    Download
  • Sponsored by One Identity

    One Nation Under Guard: Securing User Identities Across State and Local Government

    In 2016, the government can expect even more sophisticated threats on the horizon, making it all the more imperative that agencies enforce proper identity and access management (IAM) practices. In order to better measure the current state of IAM at the state and local level, Government Business Council (GBC) conducted an in-depth research study of state and local employees.

    Download
  • Sponsored by Aquilent

    The Next Federal Evolution of Cloud

    This GBC report explains the evolution of cloud computing in federal government, and provides an outlook for the future of the cloud in government IT.

    Download
  • Sponsored by Aquilent

    A DevOps Roadmap for the Federal Government

    This GBC Report discusses how DevOps is steadily gaining traction among some of government's leading IT developers and agencies.

    Download
  • Sponsored by LTC Partners, administrators of the Federal Long Term Care Insurance Program

    Approaching the Brink of Federal Retirement

    Approximately 10,000 baby boomers are reaching retirement age per day, and a growing number of federal employees are preparing themselves for the next chapter of their lives. Learn how to tackle the challenges that today's workforce faces in laying the groundwork for a smooth and secure retirement.

    Download
  • Sponsored by Hewlett Packard Enterprise

    Cyber Defense 101: Arming the Next Generation of Government Employees

    Read this issue brief to learn about the sector's most potent challenges in the new cyber landscape and how government organizations are building a robust, threat-aware infrastructure

    Download
  • Sponsored by Aquilent

    GBC Issue Brief: Cultivating Digital Services in the Federal Landscape

    Read this GBC issue brief to learn more about the current state of digital services in the government, and how key players are pushing enhancements towards a user-centric approach.

    Download
  • Sponsored by CDW-G

    Joint Enterprise Licensing Agreements

    Read this eBook to learn how defense agencies can achieve savings and efficiencies with an Enterprise Software Agreement.

    Download
  • Sponsored by Cloudera

    Government Forum Content Library

    Get all the essential resources needed for effective technology strategies in the federal landscape.

    Download

When you download a report, your information may be shared with the underwriters of that document.