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03-06-2006, 07:59 PM
U.S. Taps Exchange, Pension Funds as Debt Limit Looms


March 6 (Bloomberg) -- The U.S. Treasury today took steps to avoid slamming into the government's legal borrowing limit and to make sure the sale of a 10-year note goes ahead this week.

Treasury Secretary John Snow authorized the government to use the $15 billion available in the exchange stabilization fund on March 3 and issued a "debt issuance suspension period'' to temporarily stop investments in the Civil Service Retirement and Disability Fund. The Treasury also redeemed some of the fund's current investments.

Today's actions by the Treasury provide ``only a few days of additional borrowing capacity, which we expect will be exhausted by mid-March,'' Snow said in a letter to House Speaker Dennis Hastert. ``Treasury has now taken all prudent and legal actions to avoid reaching the statutory debt limit.''

The moves were the second Treasury has taken in the last month to stay below the debt ceiling. They will ensure the Treasury can auction and settle the 10-year-notes scheduled to be sold this week and allow government operations to continue through mid-March. The Treasury said today it will auction $8 billion in 9 year-11 month 4 1/2 percent notes on March 9, and $18 billion in four-week bills at tomorrow's sale of the securities.

"Real Costs"
"There are real costs to using these tools to stay under the limit,'' Randal Quarles, under secretary for domestic finance, told reporters after a speech in Washington. ``It is not automatic. It is a difficult thing to do. But we can do it until the middle of March, and the congressional leadership is aware of that.''

The Treasury said beneficiaries of the civil service retirement fund ``will be fully protected and will suffer no adverse consequences'' from the funding suspension. The department is required to restore all interest and principal due the fund as soon as possible, without exceeding the debt limit.

U.S. Democratic Representatives Charles Rangel of New York and John Spratt of South Carolina have said any increase in the debt limit should be tied to a plan to balance the federal budget.

Congress needs to raise the debt limit before it goes on recess March 20, Treasury spokesman Tony Fratto said.

``We cannot hostage the full faith and credit of the United States on these other issues,'' he said.

If Congress doesn't act, the U.S. will reach its borrowing limit, Fratto said. He declined to say what Treasury would do if that happens.

Before Recess
Congress will vote on raising the debt limit before the recess, said William Hoagland, the director of Budget and Appropriations for Senate Majority Leader Bill Frist.

U.S. debt on March 2 was $25 million short of the $8.184 trillion limit set by Congress, the Treasury said. Snow asked Congress in December to raise the debt ceiling. He said Treasury could use extraordinary measures to continue government operations through mid-March.

The exchange stabilization fund is used to sell foreign currency, to hold U.S. foreign exchange and special drawing rights assets, and to provide financing for foreign assets. Any use of the fund requires Snow's explicit approval.

Last month the Treasury suspended sales of state and local government securities, or SLGS. These non-marketable Treasury securities are sold to states and municipalities, which deposit them into escrow accounts to pay their own debts.

Borrowing Needs
The Treasury said in January it plans to borrow $188 billion from January to March, the most ever for a single quarter. The U.S. may have to delay the auction of some of this quarter's debt if Congress doesn't raise the borrowing limit soon.

This is the fourth time the administration of President George W. Bush has asked lawmakers to raise the debt limit. Congress complied with the last request, in November 2004, only after the Treasury was forced to delay auctioning bills and notes and move money among government pension funds.

Since Bush took office in 2001, the federal budget has gone from four years of surpluses, the longest such run since before the Great Depression, to deficits brought on by a recession, tax cuts, the Sept. 11 attacks, wars in Afghanistan and Iraq and Gulf Coast hurricane damage.

Bush last month sent Congress a $2.77 trillion budget request for fiscal 2007 that calls for a deficit of $354 billion, compared with a record $423 billion forecast this year. The Bush administration says it expects to shave the deficit to less than 2 percent of gross domestic product by 2009, from 3.2 percent this year.

The Treasury estimates it will borrow $427 billion in fiscal 2006 and $373 billion in fiscal 2007 to fund government operations, the budget showed. The government borrowed $297 billion in 2005, according to the documents.