Bangkok--12 Oct--Standard & Poor's
Standard & Poor's Ratings Services expects the U.S. government's $12.1 trillion debt limit to be increased this quarter, according to an article published today on RatingsDirect "The U.S. Debt Ceiling: As Headroom Shrinks, It's Time To Raise The Roof Beams."
On Sept. 30, 2009, public debt subject to the limit totaled $11.9 trillion, leaving $250 billion headroom.
"Although the required legislation may become enmeshed in other current political debates, which will raise uncertainty in the government debt markets and may disrupt some government functioning, we do not believe that the debt ceiling issue will prevent timely service of U.S. federal government debt," according to John Chambers, chairman of Standard & Poor's sovereign rating committee.
Standard & Poor's rates the debt of the U.S. government 'AAA' with a stable outlook.
The article notes that the U.S. government is unusual among the 123 sovereigns that Standard & Poor's rates in that it sets a statutory limit for nominal debt outstanding and more particularly has its legislature vote on the limit most often apart from the approval of the budget. The bifurcated process can thus allow a lawmaker to vote for higher spending or lower taxes while later posturing against the government debt that is engendered by fiscal deficits.
"We consider that this process is not best practice and is a weak point in an otherwise strong budgetary framework," Mr. Chambers said.
Congress has raised the U.S. federal debt ceiling 76 times since 1960, sometimes giving several years of headroom, sometimes not. Most of those times, Congress raised the debt ceiling before it was hit, but other times Congress reacted only after debt outstanding had reached its statutory limit.
"In these instances, the U.S. treasury must engage in some legerdemain to create additional headroom," Mr. Chambers noted. One possibility is to withdraw government debt holdings of the Government Securities Investment Fund (G Fund), a defined contribution plan for Federal employees. On Dec. 31, 2008, there was $113 billion of government securities in the G Fund.
Another potential source of headroom would be suspending payments to and redeeming government securities held by the Civil Service Retirement and Disability Fund. The amount of headroom that this approach can add varies with actuarial assumptions, but currently represents roughly $3 billion a month.
A third source of headroom could come from selling part of dollar holdings on the Exchange Stabilization Fund. On July 31, 2009, there was $16 billion available from this source.
A fourth source would be for the federal government to cease providing state and local governments with non-negotiable U.S. federal debt for escrow accounts.
A fifth source of headroom would be for the U.S. treasury to sell its holdings of Fannie Mae and Freddie Mac debt, which totaled $165 billion as of Sept. 30, 2009.
"With a projected 2010 deficit of $1.5 trillion and a 2010 projected change of gross federal debt of $1.9 trillion and with unexpected claims on government resources that can come from the financial sector, all of the five measures are stop gaps," Mr. Chambers said. "Once the government has exhausted these additional means of obtaining headroom, an unadjusted debt ceiling could require non-essential parts of the government to shut down, as it did twice for several days in late 1995. We believe that the ensuing public discontent, should the government be forced to shut down partially, would soon prompt lawmakers to raise the debt ceiling."
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Media Contact:
David Wargin, New York (1) 212-438-1579, [email protected]
Analyst Contacts:
John Chambers, CFA, New York (1) 212-438-7344
Nikola G Swann, CFA, FRM, Toronto (1) 416-507-2582
David T Beers, London (44) 20-7176-7101
Key Contacts:
Americas Media Relations: (1) 212-438-6667
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Americas Customer Service: (1) 212-438-7280
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