The use of extraordinary measures has become such a routine Treasury Department response every time the federal government approaches its borrowing limit that it’s clear the phrase has done little to persuade Congress to avoid the practice.
The measures nevertheless can have a cost even when Congress passes legislation to raise the debt limit and avoid a default on government obligations. Lawmakers are again approaching a debt limit deadline, this one on Sept. 29. And the Treasury has once again implemented extraordinary measures to marshal funds without hitting the ceiling.
Markets get nervous as such deadlines approach, demanding higher interest rates to reflect the greater default risk or avoiding the securities altogether and reducing the market liquidity that makes the U.S. government debt the benchmark for borrowing costs around the world.
“The idea that people might be avoiding certain Treasuries or have any discomfort with anything that is backed by the full faith and credit of the united states, is very unnerving,” said Susan J. Irving, a director who oversees budget and debt work at the Government Accountability Office. “People hold Treasuries almost the way they hold cash. It’s that safe.”
Federal watchdogs and outside groups note another irony: the longer Congress and Treasury temporarily prevent more federal borrowing — by using extraordinary measures and bringing the federal government closer and closer to the debt ceiling — the more costs accrue in the longer term than if they raised the borrowing limit without argument.
The Bipartisan Policy Center said in a report Thursday that the nervousness is appearing now and that borrowing costs are rising. It cited a July auction of three-month Treasury bills that showed a spike in interest rates that market reports attributed to worry about the debt limit debate.
“Markets have nonetheless started pricing such risk into the value of Treasury bills that mature shortly after the projected ‘X Date,’” the report said, referring to the date when the Treasury exhausts its extraordinary measures.
Shai Akabas, director of economic policy for the center, told CQ Roll Call the bills will mature in October, after Congress should have resolved the debt limit issue. “When they come due, they’re going to have to pay higher interest costs to the investors,” he said.
In a measure of the stakes, politicians’ rhetoric is also ratcheting up. President Donald Trump criticized Speaker Paul D. Ryan and Senate Majority Leader Mitch McConnell Wednesday for not raising the debt limit in a separate veterans bill. The president said that left a “big mess.” Ryan acknowledged later in the day that Congressional leaders considered doing so.
Trump’s spokeswoman said Thursday that the president supports a clean debt ceiling increase, but many Republicans in the House want to see budget policy changes in legislation that raises the debt limit.
“I do not believe we have to pass a clean debt ceiling. We can and should couple an increase in the debt ceiling with budget reforms — including entitlement reforms — that change the trajectory of our ever-increasing debt,” Rep. Tom Cole, R-Okla., said in his weekly newsletter Monday.
Treasury Secretary Steven Mnuchin has called throughout the summer for a clean increase in the nation’s debt limit. Mnuchin first ordered the last-ditch accounting jujitsu known as extraordinary measures in March. He referred to them Monday as “magic super Treasury powers.” Mnuchin says Congress has until Sept. 29 to raise the debt limit.
Most extraordinary measures amount to what is essentially a temporary rearrangement of funds related to federal employees’ retirement accounts, but the maneuvers also include utilizing a fund designed to protect against fluctuations in international currency exchanges and a suspension in federal lending to state and local governments.
The most recent debt ceiling debates were in 2015, 2013, and 2011, the latter of which resulted in the budget deal that set discretionary spending caps for 10 years.
The GAO said in a July 2012 report that the 2011 impasse over the debt limit raised borrowing costs $1.3 billion in fiscal 2011 alone. “This does not account for the multiyear effects on increased costs for Treasury securities that will remain outstanding after fiscal year 2011,” the report said, adding that the work on debt limit operations ate up Treasury time and resources.
The GAO revisited the debt limit in a July 2015 report. It found that Treasury interest rates rose more rapidly as the department was running out of room to apply extraordinary measures.
“Investors reported taking the unprecedented action of systematically avoiding certain Treasury securities — those that matured around the dates when the Department of the Treasury . . . projected it would exhaust the extraordinary measures,” the GAO report said about the 2013 impasse. “There were also unusually low levels of demand at the relevant auctions and additional borrowing costs to Treasury.”
Complicating the coming debate, the Sept. 29 deadline to raise the debt limit falls as government funding runs out on Sept. 30. Lawmakers could use the occasion to extract concessions on one measure in exchange for a vote on the other. They also could opt to both appropriate funds and raise the debt limit in a single bill. The complicated negotiations could raise the risk of delay or an inability to agree on legislation.
Moody’s Investors Service, in a report Thursday, noted the catastrophic consequences of a default, but also said it didn’t expect that to happen. The credit rating company said its “Aaa” rating “reflects our view now, as in past episodes, that the ceiling will ultimately be raised, just as it has been every time it was reached since this fiscal rule was introduced in 1917.”
Sarah Carlson, senior vice president in the sovereign risk group at Moody’s and lead analyst for the U.S., said in an interview with CQ Roll Call, “The politics and the discussions around raising the debt limit have typically been noisy . . . But ultimately what we have seen is, however noisy the politics, ultimately the debt ceiling does get raised.”
Fixed Debt Limit
What happens if Congress doesn’t raise the debt limit?
Moody’s also said 14 percent of total spending would be delayed or reduced. It cited Federal Reserve and Treasury documents from 2011 and 2013 and said it was “operationally possible” to prioritize interest payments on the U.S. debt, which “would be undertaken to preserve the full faith and credit of the US government and to preserve financial market stability.”
Irving, at the GAO, said while it’s “mechanically possible” to separate out Treasury interest and principal payments, prioritizing other government expenses is more complicated.
The Bipartisan Policy Center estimated in its report that Treasury “would be unable to meet approximately 23 percent of all obligations due in the several weeks that follow.” Its report said Oct. 2 is “a particularly difficult day for federal finances due to a large payment that is owed to the Military Retirement Trust Fund,” noting in 2016 the payment was $81 billion.