Treasury will run out of borrowed money by Oct. 17

Gregory Korte | USA TODAY

WASHINGTON — The United States will run out of borrowed money "no later than Oct. 17" unless Congress raises the $16.7 trillion debt limit, Treasury Secretary Jacob Lew said in a letter to Congress Wednesday.

Lew's letter marks the first time he has given a date certain for when the government would hit the debt ceiling and comes as Congress is at another impasse on how to keep the government running and pay its past bills.

It's not a coincidence that Oct. 17 is a Thursday, said Steve Bell, economic policy director for the Bipartisan Policy Center.

That's because the Treasury typically rolls over $100 billion in debt every Thursday, as old bonds mature and most investors simply use the proceeds to buy new bonds. Some bond holders may park their money elsewhere. Others may demand higher yields. "But at what price? That;s the big imponderable," Bell said.

"I think people don't understand what this does to the market psychology. It's not within Congress's full control," said Bell, a former managing director of Salomon Brothers. He said bond rates are creeping up on the uncertainty.

Lew expressed the same worry in a speech to the Economic Club of Washington last week, saying a massive sell-off of bonds could create an immediate crisis. "The point is, trying to time a debt limit increase to the last minute could be very dangerous," he said.

The nation has been at the debt limit since May 17. Since then, the Treasury Department has undertaken what it calls "extraordinary measures," which include delaying pension fund payments and drawing down an emergency fund.

Once those measures are exhausted, the government would have only enough money to pay its bills as it has revenue on any given day. As of Oct. 17, the Treasury expects its cash-on-hand will be reduced to $30 billion. The government typically spends $60 billion every day.

It's unclear exactly how Treasury would juggle those payments. During the last debt-limit crisis in 2011, the Treasury Department ruled out many stopgap measures to maintain spending and pay its debts, such as selling off assets. The United States has more than $350 billion in gold reserves on its balance sheet, for example, but Treasury officials said a "fire sale" on gold would hurt the dollar and the economy, according to a 2012 report from the Treasury Office of the Inspector General. The Treasury has no practical way of reducing payments by an across-the-board percentage to stay under the debt limit.

"If we have insufficient cash on hand, it would be impossible for the United States of America to meet all of its obligations for the first time in our history," Lew said.

Even dancing so close to a debt-limit deadline can be costly. In 2011, the debt-limit showdown cost the government $1.3 billion in increased borrowing costs, according to a review last year by the Government Accountability Office. That study looked at the yield spread between government and corporate bonds to determine how the markets were reacting to the uncertainty caused by the debt-limit debate.

Lew's warning comes as Congress debates another measure that would authorize spending for the new fiscal year beginning Oct. 1. A resolution passed by the Republican House would keep government spending roughly at current levels and extend the debt ceiling — but only for paying the principal and interest on the debt.

The Obama administration opposes the pay-the-debt-first plan, which Lew called "default by another name."

"The debt ceiling must be raised," White House spokesman Jay Carney said Wednesday. "This cannot and should not be a matter of negotiation."

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