The U.S. government hit its $14.3-trillion debt ceiling on Monday, triggering a series of “extraordinary measures” to stave off a default while politicians argue over raising the borrowing limit.
Treasury Secretary Tim Geithner announced he was suspending payments into two federal pension funds, after the government reached its maximum legal borrowing limit. Mr. Geithner said the suspension should allow the U.S. to avoid a default before August 2 and urged Congress to agree to raise the debt ceiling before this 11-week deadline expires.
“I have written to Congress on previous occasions regarding the importance of timely action to increase the debt limit in order to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens,” said Mr. Geithner in a letter to Congress. “I again urge Congress to act to increase the statutory debt limit as soon as possible.” Under Mr. Geithner's plan, the U.S. government will temporarily stop payments into the civil service retirement and disability fund and cut payments into the federal employees retirement system. Both funds provide retirement benefits to federal employees.
Mr. Geithner pledged to repay the lost funds once Congress has approved a higher debt ceiling. But there has been little progress in recent weeks over this issue.
The U.S. administration has insisted it needs to be able to push national debt above $14.3 trillion as it navigates the financial crisis. President Barack Obama said last week that without a higher limit, investors would lose faith in the country's ability to service its debts. This, he warned, might “unravel the entire financial system”, while Mr. Geithner has predicted that the U.S. would fall back into recession.
Mr. Obama's opponents have demanded major budget cuts in return for permission to borrow more. House speaker John Boehner, the Republican Congressman for Ohio, has argued that “everything should be on the table except raising taxes”.
The debt limit was created in 1917, when Congress allowed the treasury to borrow up to $11.315 billion to fund U.S. participation in World War I. Since 1962, Congress has raised the debt ceiling on 74 separate occasions.
The extent of U.S. borrowing was under fresh scrutiny last month when Standard & Poor's cut its outlook on the country's AAA-rating from “stable” to “negative”.
There is still a strong appetite for U.S. debt in the bond markets. The yield or interest rate demanded by traders on 10-year government debt remained low at around 3.165 per cent, only slightly above Germany. U.K. 10-year bonds were trading at a yield around 3.38 per cent.
Federal Reserve chairman Ben Bernanke, who also supports raising the debt ceiling, said the U.S. should try to boost growth through increased spending on research and development. — © Guardian Newspapers Limited, 2011
