U.S. will hit debt limit on Dec. 31, Treasury Department says

The debate over the debt ceiling is likely to be another flash point in the capital's tumultuous negotiations over taxes and spending — even if lawmakers are able to pass a measure to avoid a series of deep spending cuts and sharp tax increases set to take effect at the end of the year.

President Obama has demanded that the debt limit be taken off the table as a negotiating point, but Republicans say it is an important piece of leverage needed to force spending cuts and restrain the growth of government. It was the debt-limit debate in the summer of 2011, when the nation came within days of default before a deal was struck, that led to the legislation that has helped create the year-end "fiscal cliff."

How and whether the fiscal cliff is resolved will affect how much time the Treasury has in pushing back the date of default.

If the nation goes over the fiscal cliff, two forces will work against each other. Taxes would rise and spending would be cut, requiring less U.S. borrowing and potentially delaying default. Higher unemployment and a recession would also be likely, depressing tax receipts and requiring more borrowing.

In contrast to the fiscal cliff, defaulting on the debt would cause an immediate financial earthquake, probably causing intense volatility in the markets given the special role played by U.S. government debt.

The federal government borrows about $100 billion a month, and Geithner's letter to Congress said undertaking "extraordinary measures" — as the Treasury did in 2011 — could create about $200 billion of room to continue borrowing.

"However," he wrote to lawmakers, "given the significant uncertainty that now exists with regard to unresolved tax and spending policies for 2013, it is not possible to predict the effective duration of these measures."

As part of these efforts, the Treasury will suspend on Friday a program that helps states and localities manage their borrowing, freeing up $4 billion to $17 billion to spend elsewhere.

Then, after Monday, Treasury can tap a range of federal funds that benefit government employees — most critically, the money-market fund in which many federal employees invest as part of their thrift savings plans. These efforts could create $185 billion in borrowing space.

Federal employees would be unaffected, as long as Congress ultimately raises the debt limit by the final deadline.

Finally, the Treasury can tap a fund used to buy and sell foreign currencies known as the exchange stabilization fund, which would open up about $23 billion in headroom.

Source: http://www.news.theusalinks.com/2012/12/27/u-s-will-hit-debt-limit-on-dec-31-treasury-department-says/