Treasury Secretary Jacob J. Lew warned that the congressional deadlock over the U.S. debt ceiling is “beginning to stress the financial markets,” and failing to raise it by Oct. 17 could put Social Security and Medicare payments at risk.
“Failing to raise the debt ceiling will impact everyday Americans beyond its impact on financial markets,” Lew told the Senate Finance Committee today. Between Oct. 17 and Nov. 1, the U.S. has “large payments to Medicare providers, Social Security beneficiaries, and veterans, as well as salaries for active-duty members of the military. A failure to raise the debt limit could put timely payment of all of these at risk.”
The U.S. government is in the 10th day of a partial shutdown and a week away from the day Lew has said his department will run out of measures to stay below the nation’s limit on borrowing. House Speaker John Boehner, an Ohio Republican, has rejected President Barack Obama’s call to pass a debt ceiling increase without policy conditions.
In his prepared remarks, Lew cited rising yields on short-term Treasuries and measures of stock-market volatility as evidence investors are growing worried about the stalemate in Washington.
Yields on Treasury bills maturing in the second half of October and early November have surpassed the peaks of similar maturities in July 2011, when Congress and the White House were debating a debt-limit increase, Lew said today.
“Trying to time a debt-limit increase to the last minute could be very dangerous,” Lew said. “If Congress does not act and the U.S. suddenly cannot pay its bills, the repercussions would be serious.”
Earlier this week, rates on one-month Treasury bills reached 0.34 percent, the highest since October 2008, while the Standard & Poor’s 500 Index sank to a one-month low.
The S&P 500 today rose 1.3 percent to 1,677.87 at 10:02 a.m. in New York. Treasuries dropped on signs the debt limit will be raised. The yield on the benchmark 10-year Treasury note rose five basis points, or 0.05 percentage point, to 2.71 percent, the highest level since Sept. 23.
Lew has said that so-called extraordinary measures -- the accounting moves he’s been using since May to stay below the $16.7 trillion debt limit -- will expire by Oct. 17, leaving him with about $30 billion on hand. Expenditures can be as high as $60 billion on some days, Lew has said.
Lew said an increase in borrowing costs due to Congress’s failure to raise the debt limit “could not easily be undone and our actions would impact Americans for generations to come.”
Lawmakers for the first time yesterday embraced one possible path out of the fiscal impasse, a short-term deal to avoid default, even as they battled over how to make it happen.
The sticking point remains House Republicans’ demand that the deal involve policy conditions that cut the budget deficit. Senate Democrats reject anything beyond an extension of the debt ceiling.
Senator Orrin Hatch of Utah, the top Republican on the Finance Committee, said the Obama administration is unfairly blaming Congress for not raising the debt limit.
“Our nation’s debt is now larger as a share of our economy than at any time since World War II,” Hatch said. “Despite the rhetoric of the administration, our growing debt is not solely the result of decisions made by Congress. It is not all due to the financial crisis.”
Lew said today the idea of some Republicans in Congress to pay some bills instead of others, known as prioritization, wouldn’t “solve the problem.” Under questioning, he called such a strategy “default by another name.”
“The United States should not be put in a position of making such perilous choices for our economy and our citizens,” he said. “There is no way of knowing the irrevocable damage such an approach would have on our economy and financial markets.”
Economists at Goldman Sachs Group Inc., IHS Inc. (IHS:US) and BNP Paribas SA said they expect the Treasury to husband the tax money it collects to make sure it can meet interest payments on the nation’s debt. Other obligations, from salaries of government workers to payments to defense contractors, would face the ax.
The Treasury Department typically takes in about $7 billion daily in income and payroll taxes, though those amounts can vary significantly from day to day, the Congressional Budget Office said in a Sept. 25 report.
A $6 billion interest payment is due on Oct. 31. Bills totaling about $67 billion are due the following day, for Social Security benefits for retirees, Medicare payments to hospitals and other health-care providers, and military pay and benefits.
The threat of a sudden, large reduction in government outlays comes as the world’s largest economy is struggling to gain momentum. Growth in the first two quarters of 2013 averaged 1.8 percent, lower than the 2.2 percent average pace since the recovery began in June 2009.
Lew is meeting later today and tomorrow in Washington with finance ministers and central bankers from the Group of 20 economies.
“The United States is the anchor of the international financial system,” he said. “Other countries look to us for how to govern and how to maintain economic vitality.”
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