U.S. Treasury Secretary Timothy Geithner on Thursday stepped up pressure on Republican lawmakers to raise the nation's $14.3 trillion debt limit, warning failure to act would lead to an economic catastrophe.
Geithner said the federal government may hit by March 31 the ceiling on the amount of debt it is legally allowed to issue, and urged Congress to raise it by then to avoid pushing the United States into default.
Even a short-term or limited default would have catastrophic economic consequences that would last for decades, Geithner said in a letter to U.S. Senate Majority leader Harry Reid, a Nevada Democrat.
The letter marked an effort by the Obama administration to take the offense in a debate newly empowered Republicans on Capitol Hill have tried to dominate. Republicans are pushing for fresh spending cuts to accompany any debt limit hike.
The American people will not stand for such an increase unless it is accompanied by meaningful action by the president and Congress to cut spending and end the job-killing spending binge in Washington, House of Representatives Speaker John Boehner said in a statement.
Congress has routinely voted to raise the debt limit every year since 2002, but the issue has taken on greater significance this year now that Republicans control the House.
While Boehner said the United States cannot default on its debts, the Ohio Republican also said it cannot continue to borrow recklessly.
Briefing reporters on the issue, a U.S. Treasury official urged lawmakers preparing for a new budget -- and a likely fractious debate over spending -- not to mix up the debt limit issue with calls for greater restraint in government spending.
The official said the debt limit should be dealt with on a separate track from spending cuts.
ADMINISTRATION CONFIDENT CONGRESS TO ACT
The official, who spoke on condition of anonymity, expressed confidence that Congress will raise the debt limit if only because not doing so would be so damaging.
If you look over the long history of these things, they kick up a fair amount of dust and noise but in the end cooler heads prevail and responsibility wins out and the debt limit is always increased, the official said.
The closest the United States has come a debt limit default was in 1995, when Republicans led by then-House Speaker Newt Gingrich forced a partial government shut down over the issue.
The episode did not sit well with voters and Republicans paid dearly for the move in 1996 elections, said Douglas Holtz-Eakin, a former Congressional Budget Office director and economic adviser to John McCain's 2008 presidential campaign.
Boehner was there for that. He remembers it vividly. He's not going to go there, Holtz-Eakin said, adding that freshmen lawmakers still have time to be educated on the consequences of the move.
Geithner said it was difficult to be certain of when the existing debt ceiling would be hit, saying it could happen any time between March 31 and May 16.
Officials said the Treasury could engage in extraordinary measures to delay hitting the limit, such as suspending sales of state and local government securities, shrinking a $200 billion Federal Reserve financing program or dipping into some government pension funds. But these would probably only delay the inevitable for eight weeks at most, they said.
Once these steps have been taken, no remaining legal and prudent measures would be available to create additional headroom under the debt limit, and the United States would begin to default on its obligations, Geithner said.
Eventually, the U.S. government would no longer be able to pay the interest on its debt, which has been running more than $21 billion a month in the current fiscal year. If that happened, Geithner said, there would be consequences for the U.S. economy potentially much more harmful than the effects of the financial crisis of 2008 and 2009.
A default would throw markets into turmoil and would dramatically increase government borrowing costs for years to come, further increasing the U.S. debt burden and sapping resources from the economy.
Bond investors remain wary of the safety and soundness of sovereign debt after Greece and Ireland needed bailouts last year, but Treasury officials said they do not see any evidence of concerns over the debt limit pushing up Treasury debt yields at this time. Major foreign investors including China and Japan have not voiced any concerns, they added
Treasury officials attribute recent falls in bond prices and higher yields to economic reports that have shown the U.S. recovery gaining strength.
(Additional reporting by Richard Cowan and Emily Kaiser, Editing by Chizu Nomiyama)