Analysis: New borrowing tool could make U.S. debt debates less harrowing

Fri Nov 1, 2013 3:12pm EDT
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By Jason Lange

WASHINGTON (Reuters) - When a political impasse last month pushed America to the brink of default, the Obama administration noted with apprehension that it had to borrow vast sums every Thursday.

This debt strategy has kept financing costs low but left Washington vulnerable to a sudden loss of lenders' trust as lawmakers debate whether to raise a cap on public borrowing.

Next week, the U.S. Treasury will unveil plans for a new borrowing tool that could eventually take some of the edge off future fiscal debates.

Most U.S. politicians understand that not raising the debt ceiling can trigger default within days or weeks. What is less appreciated is that if creditors balked at any of the weekly auctions where the Treasury must raise $100 billion to repay short-term debts, the federal government could go broke immediately.

"We could unexpectedly dissipate our entire cash balance," Treasury Secretary Jack Lew told lawmakers on October 10.

The new borrowing tool is part of an effort to reduce the U.S. government's reliance on short term debt, which increased dramatically over most of the last decade to cover ballooning budget deficits.

Under the new program, the Treasury plans to start selling 2-year floating-rate notes at regular auctions beginning in January.

The yield on the new notes will move up or down depending on rates for 3-month Treasury bills, and officials have said initial sales will supplant issuance of debt maturing in under a year, rather than longer-term fixed-rate debt.   Continued...

U.S. Treasury Secretary Jack Lew speaks at Center for American Progress 10th Anniversary policy forum in Washington, October 24, 2013. REUTERS/Yuri Gripas