U.S. Treasury Implements New Measure to Avoid Debt-Ceiling Breach

The U.S. Treasury Department has taken a new measure to prevent a debt-ceiling breach, which could have severe economic and financial market consequences. The Treasury has announced that it will suspend the issuance of new securities to the Civil Service Retirement and Disability Fund (CSRDF) and the Postal Service Retiree Health Benefits Fund (PSRHBF), and redeem existing securities held by these funds. This allows the Treasury to temporarily increase its cash balance and avoid breaching the debt ceiling.



The Treasury estimates that these extraordinary measures will last until the summer, providing the government with additional time to negotiate a debt-ceiling increase with Congress. However, these measures are not a long-term solution, as the Treasury will eventually exhaust them and run out of cash, leading to a default if the debt ceiling is not raised. The Treasury has estimated that it will run out of cash by June 1, 2023, if the debt ceiling is not raised.

The debt ceiling is the statutory limit on the amount of debt the U.S. Treasury can have outstanding to pay for the government's bills, obligations, and current and past expenses that Congress has already approved. Without a congressional increase in the debt limit, the U.S. could eventually default on its debt and obligations, an unprecedented event with a potentially serious impact on global markets and economies.

A default could lead to a loss of confidence in U.S. Treasury securities, causing their prices to fall and yields to rise. This could spill over into other financial markets, leading to increased volatility and potential contagion effects. The Congressional Budget Office (CBO) estimates that a default could lead to a recession with a peak unemployment rate of around 7% and a cumulative loss of output of around 4% of GDP.

To mitigate the consequences of a debt-ceiling breach, the Treasury could use its extraordinary measures to continue paying its obligations for a limited time, buying the government some breathing room to negotiate a solution. The Federal Reserve could also implement monetary policy measures to support the economy, such as lowering interest rates or increasing quantitative easing. However, the best course of action is to avoid a breach altogether by raising the debt ceiling and implementing fiscal reforms to reduce the budget deficit.

In conclusion, the U.S. Treasury has taken a new measure to prevent a debt-ceiling breach, but these extraordinary measures are not a long-term solution. A default could have severe economic and financial market consequences, and it is crucial to avoid a breach by raising the debt ceiling and implementing fiscal reforms.