US Treasury secretary Tim Geithner warned on Wednesday he would have to take "extraordinary measures" to avoid a default on the US's legal obligations as the country is set to breach its $16.4tn (£10.16tn) debt limit.
In a letter to Congress, Geithner said the debt ceiling would be reached on 31 December and that the Treasury could raise $200bn (£124bn) to fund government spending as a stopgap measure. But he warned that the current impasse over the fiscal cliff budget crisis meant it was uncertain how long that money would last.
"Under normal circumstances, that amount of headroom would last approximately two months.
"However, given the significant uncertainty that now exists with regard to unresolved tax and spending policies for 2013, it is not possible to predict the effective duration of these measures," Geithner warned.
In the two-paragraph letter Geithner also warned that "the extent to which the upcoming tax filing season will be delayed as a result of these unresolved policy questions is also uncertain."
A similar row over increases in the debt ceiling in the summer of 2011 led to a historic downgrade of the US's credit rating and panic on stock markets around the world.
The Treasury secretary's warning comes as Barack Obama prepared to cut short his Christmas holiday in Hawaii, with the intention of returning to Washington in the hope of restarting the stalled budget talks.
Discussions with House speaker John Boehner collapsed last week after the top ranking Republican launched his own "Plan B" aimed at tackling the year-end budget crisis. But Boehner's plan also fell after members of his own party threatened to block any deal that would raise taxes.
Boehner and other senior Republicans released a statement on Wednesday saying: "The lines of communication remain open, and we will continue to work with our colleagues to avert the largest tax hike in American history, and to address the underlying problem, which is spending."
Obama is hoping to pass a stop-gap deal through the Senate, where he has some support from Republicans. The president wants to implement measures that would raise taxes on those earning over $250,000 (£155,000) while preserving most of the other tax cuts under threat, delaying spending cuts and extending unemployment benefits for the long-term unemployed.
Boehner said the Senate would have to make the first move before the House would commit to voting on any bill. He said two bills had already been put forward to tackle the crisis.
"If the Senate will not approve and send them to the president to be signed into law in their current form, they must be amended and returned to the House. Once this has occurred, the House will then consider whether to accept the bills as amended, or to send them back to the Senate with additional amendments," he said.
The Treasury said it can free up around $200bn (£124bn) by taking four "extraordinary measures." Nearly all the measures relate to peripheral investments that the Treasury makes in certain funds.
In essence, the Treasury will act like an indebted consumer who stops running up his credit card when he already has more bills than he can pay. The result: the Treasury will not cut its debt, but only stop spending until its credit limit is raised again. Only Congress can raise the debt limit.
The department took similar measures last year, when the US passed the debt ceiling limit in May and Congress didn't increase it again until August. The most remarkable of the extraordinary measures includes allowing the Treasury to redeem, or stop, any investments in two major pension funds.
The first is the civil service retirement and disability fund. The CSRDF, as it is known, is a kind of pension fund that provides defined benefits (stock market-linked retirement incomes) to retired and disabled federal employees.
The US Treasury puts about $6bn (£4bn)a month into the fund – not in cash, but in Treasury securities. The Treasury would either redeem some of those securities or suspend new payments. It could also choose to continue to make payments to the fund, but if the debt ceiling is not raised within two months, the Treasury would have to stop.
The second major pension fund is the government securities investment fund, or G Fund, which is part of the federal employees' retirement system thrift savings plan. Like the CSRDF, the G Fund is invested in special securities. But, because the G Fund matures every day, the Treasury can immediately free up money by suspending the whole thing. Suspending the G Fund will do the most to make room for the Treasury, freeing up $156bn (£96bn) of the $200bn (£124bn) it's aiming for.
After Congress raises the debt ceiling, the Treasury has to make up for all the payments it missed to the pension funds, so none of the employees will be hurt.
The Treasury will also temporarily stop issuing state and local government securities or SLGS – bonds it created to help state and local governments reinvest any profits made from issuing regular municipal securities.
Since state and local governments are not allowed to reinvest their profits in other, riskier kinds of investments, the Treasury gives them SLGS bonds as a way of holding their money safe.
But stopping SGLS bonds won't cut the country's debt; it will only avoid adding to it. In its most minor move, the Treasury will stop contributing to the exchange stabilisation fund, which it uses to buy foreign currencies. The public debt of the US is increasing at about $100bn per month, the Treasury said.
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