Bank officials discuss debt impasse with Treasury
WASHINGTON (AP) — Executives from the country's biggest banks met with U.S. Treasury officials Friday to discuss how debt auctions will be handled if Congress fails to raise the borrowing limit before Tuesday's deadline.
Treasury officials met in New York with representatives from 20 large banks that serve as primary dealers for the sale of Treasury securities. They took questions amid growing concern that the borrowing limit will not be raised in time to avoid a default on the debt. And they discussed the possibility of delaying or reducing the size of the upcoming auctions if the debt limit is not raised.
Some of the banks recommended that the government use short-term Treasury bills, called cash management bills, in place of a full refunding auction. That would raise some debt but not as much as a refunding. So it could keep Treasury under the current $14.3 trillion borrowing limit.
No decisions were announced at the meeting, and Treasury provided no details of how the government will decide which bills to pay should the borrowing limit not be raised. A statement said the meeting was to prepare for an upcoming quarterly debt auction.
White House spokesman Jay Carney said the administration did not plan to provide the public with details Friday on how the government will prioritize payments. Carney said the administration plans to lay out its contingency plans, but it would wait until closer to next Tuesday's deadline.
Treasury makes 80 million payments a month.
If the debt ceiling is not raised, Treasury will not have the ability after Aug. 2 to borrow new debt. But it would still be able to refinance debt that is maturing as long as the operation does not increase the total debt supply. Treasury has to borrow on average $125 billion in new debt each month and refinance $500 billion in maturing debt.
The next quarterly auction is scheduled for the week of Aug. 8. If it is not postponed, Treasury is scheduled to release its borrowing plans at a news conference Wednesday. Market participants had expected that Treasury would announce plans to borrow around $72 billion, the same amount that the government raised at the last refunding auction in May.
Scott Sherman, an interest-rate strategist at Credit Suisse, said that if the debt ceiling is not raised by Tuesday, Treasury will have to decide whether to proceed with a tentative schedule for the debt auctions the week or Aug. 8 or announce plans to trim the size of those auctions to keep under the current debt limit.
Moody's Investors Service said late Friday that the United States should be able to keep its triple-A credit rating as long as Washington works out a deal that lets it continue to pay bondholders.
"If the debt limit is not raised before Aug. 2, we believe that Treasury would give priority to debt service payments and could thus postpone a potential debt default for a number of days," Moody's said in its new report. "Revenues would be more than adequate for some period of time to meet those payments although other outlays would be severely reduced as a result."
Private economists believe the government would pay bond holders first if the debt limit is not raised. If the Treasury missed a bond payment, the country would likely default on its debt. That could rattle markets and increase borrowing costs on most consumer and business loans, many of which are linked to the rates on Treasurys.
Some economists say the government will have enough cash on hand to meet interest payments and some other payments until as late as Aug. 15.
Officials of the bond-trading divisions of JPMorgan, Goldman Sachs, Citigroup and the other big banks attended the meeting at the New York Federal Reserve Bank.
Treasury would normally meet with half of the 20 dealers before a quarterly auction. However, given the heighted concerns surrounding the debt stalemate, Treasury decided to expand the discussions to include all 20 banks.
Treasury said in its statement that the general consensus among the banks participating in the discussion was that Congress "should act as quickly as possible to raise the debt ceiling for as long a period as possible to lift the cloud of uncertainty from the economy."
The Obama administration wants Congress to increase the borrowing limit to last beyond the November 2012 elections. Republicans in the House want a smaller initial increase, and second increases tied to more spending cuts that would take place next year before the election.
AP Business Writer Pallavi Gogoi in New York contributed to this report.