US Treasury starts to tackle debt limit

City A.M. Reporter
The US Treasury has initiated the first in what is likely be a series of manoeuvres aimed at preventing it from hitting its legal debt limit, as a political battle over spending intensified.

The action to reduce the amount of money the Treasury holds in a special account at the Federal Reserve marked a small step in freeing up new borrowing capacity, but was symbolically important as the Obama administration and Republican lawmakers stake out ground in a wider budget debate.

On Tuesday, the Treasury's remaining borrowing capacity was just $279bn before it hit a legally set $14.3 trillion debt ceiling.

The figure is a tiny amount for the government, which relies on borrowing to finance day-to-day costs for everything from running the war in Afghanistan to cutting Social Security checks for retirees.

Treasury Secretary Timothy Geithner warned Congress earlier this month the debt limit could be reached as soon as March 31 or as late as May 16, depending on how the economy performs and how much flows into Treasury's coffers by an April 15 tax deadline.

Failure to lift the ceiling could precipitate default and have "catastrophic" economic consequences, Geithner warned.

The Treasury gained limited ground through Thursday's action, which officials said was already factored into Geithner's estimate of when the debt ceiling will be reached.

Starting on February 3, it will gradually cut the balance in the Supplementary Financing Program from $200bn to $5bn. It can do so by letting short-term bills that finance it mature and not issuing new ones.

Under the program, which was set up in September 2008 at the peak of the financial crisis, the Treasury sold short-term bills and turned the proceeds over to the Fed to help manage its balance sheet while the central bank propped up a faltering banking system.

Republicans are seeking to use the need to raise the nation's borrowing capacity as leverage to exact spending cuts from the Obama administration.

A call to slow government spending helped Republicans seize control of the House of Representatives in November's elections.