We’re sensing a shift in the discussion about the debt ceiling. Now everyone assumes it won’t be raised, at least not initially, and that there will be a period where the government has to “manoeuvre” to avoid a default.
Nomura walks through Tim Geithner’s bag of accounting tricks:
1. Shrink the Supplementary Financing Program (SFP): Since 2008 the Treasury has issued SFP bills in an effort to drain reserves from the banking system and support quantitative easing (QE). These bills count against the debt ceiling. A likely first step would be to allow these bills to expire. This could begin as soon as February.
2. Redeem intra-governmental debt: There are two kinds of US government debt: that held by the public and that held in intra-governmental accounts, such as the Social Security trust fund. In a debt limit crisis, federal law allows the Treasury to redeem government securities held by the Civil Service Retirement and Disability Trust Fund – one of many such accounts. As securities held in intra-governmental funds count against the debt ceiling, early redemption enables the Treasury to issue debt to the public to generate operating cash. The Treasury must still pay benefits to fund members, but it could use early redemptions as a temporary stop-gap measure.
3. Halt investment in trust funds: Similarly, federal law authorizes the Treasury to halt investment of surplus receipts (including reinvestment of principle and interest payments) in three government trust funds (the Civil Service fund, the Exchange stabilisation fund and the “G-fund”). These proceeds would normally be invested in Treasury securities that count against the debt ceiling. Temporarily delaying these investments would allow the Treasury to issue more debt to the public.
4. Swap debt in trust funds: A branch of the Treasury department called the Federal Financing Bank (FFB) holds the debt of various government agencies. Agency debt does not count against the debt ceiling. In the 1995-96 crisis, the Treasury swapped Treasury securities held in the Civil Service fund with agency debt held by the FFB.
5. Suspend sales of “slugs”: In his letter to Congressional leaders, Secretary Geithner said that the Treasury could suspend the sale of State and Local Government Series (SLGS) bonds – known as “slugs” – which are bought by municipal governments with surplus cash. While theoretically correct, SLGS outstanding have actually declined over the last year, so gross issuance is probably small.
They estimate this will give the government about $1.1 trillion in extra spending, lasting about 4 months, during which we could see much heightened debt market volatility.