WASHINGTON (ICIS)--US Treasury Secretary Jacob Lew on Monday warned that a new debt ceiling crisis could arise sooner than expected, with the Treasury likely to run out of money by the end of February rather than in early March as earlier forecast.
In a speech at a financial policy centre meeting, Lew noted that the short-term extension of the federal debt ceiling passed by Congress in mid-October last year will expire at the end of this week on 7 February.
On 17 October last year, The US Senate and House agreed on a short-term extension of the federal debt ceiling to 7 February, ending a crisis that had shut down parts of the federal government from 1 through 16 October and raised the spectre of a financial default by the US government.
Decreed by Congress in 1917 to exert congressional control over the amount of money Uncle Sam can spend by capping the amount of cash he can borrow, the debt ceiling has required repeated increases and suspensions since.
Lew noted that in the compromise reached in October last year between the Democrat majority Senate and the Republican-controlled House, the debt ceiling mandate was merely suspended rather than raised.
That “temporary suspension of the debt limit lasts only through 7 February, which is the end of this week,” Lew said.
“After that, and in the absence of congressional action, Treasury will be forced to use extraordinary measures to continue to finance the government,” he said.
“Let me repeat: in just a matter of days, the temporary suspension of the debt limit will end, and the Treasury Department will have to start using extraordinary measures so the government can continue to meet its obligations,” he added.
Those extraordinary measures involve the Treasury Department moving assets around, postponing some payments and using available income and cash-on-hand to meet its bond obligations.
However, said Lew, in the current run-up to the debt ceiling limit, the timing is more inconvenient because Treasury is already having to send out tax refund checks to Americans who filed their annual tax returns early.
Those cash outflows, said Lew, “deplete our borrowing capacity very quickly”.
“We now forecast that we are likely to exhaust these measures by the end of this month,” he said.
Earlier forecasts had put the actual cash-crunch somewhat later to a date in early March that was never specified.
Lew called on Congress to act sooner rather than later to raise the debt limit - which now stands at around $16,699bn - and not risk another eleventh-hour financial and economic crisis.
“The fact is, simply delaying action on the debt limit can cause harm to our economy, rattle financial markets and hurt taxpayers,” he warned, noting that during last year’s debt ceiling stand-off, consumer and business confidence levels plummeted.
Many Republicans in the House want a deal to roll-back some federal government spending as part of a new debt ceiling extension, noting that the national debt continues to grow apace.
The US debt has pushed past $17,345bn and is increasing at a rate of about $10,000 per second.
But Republicans suffered a major public relations setback last year in their refusal to agree to increase the debt ceiling, and Republican leaders in Congress have shown little willingness to repeat the tactic again.
“The truth is, the longer we wait, the greater the risks become,” Lew said. “Whether it is the economic recovery, the financial markets or the dependability of Social Security payments and military salaries - these are not things to put at risk.”
Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy