Geithner Urges Debt Limit Increase, Warns of Default

Treasury Secretary Timothy F. Geithner today urged lawmakers to raise the federal debt limit in the first quarter of 2011, saying a failure to act could make it impossible for the U.S. to access global credit markets.

If Congress does not raise the debt limit, “the Treasury would be forced to default on legal obligations of the United States, causing catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009,” Geithner said in a letter to Speaker of the House John Boehner, Senate Majority Leader Harry Reid and all other members of Congress.

The Treasury estimates the debt limit could be reached as early as March 31, and “most likely” between that date and May 16. The debt limit stands at $14.29 trillion, leaving about $335 billion of “headroom,” Geithner’s letter said.

Boehner, a Republican from Ohio, said in a statement Congress needs to pair a debt-limit increase with spending cuts and changes to a “broken” budget process. He said the country can’t afford default or to “recklessly” keep borrowing.

“The American people will not stand for such an increase unless it is accompanied by meaningful action by the President and Congress to cut spending and end the job-killing spending binge in Washington,” Boehner said.

Obama administration officials said they want to separate the debt limit from other fiscal policy concerns. In a briefing with reporters today, a Treasury official predicted Congress would act to avert a crisis.

Spending, Taxes
The debt limit should be resolved without being tied to long-term fiscal issues including spending and taxes, the Treasury official told reporters. Lawmakers will probably agree to raise the limit because of the consequences of the idea that the U.S. could default, the official said.

The U.S. had a $1.3 trillion federal budget deficit in fiscal year 2010, which ended Sept. 30. President Barack Obama’s debt-reduction panel failed last month to agree on recommendations for ways to reduce the annual deficit to about $400 billion in 2015.

Lawmakers are likely to wait “until the last minute” to pull back from the brink, said Stephen Stanley, chief economist at Pierpont Securities LLC. He predicted the House would seek to win concessions from the Senate and the White House by using the debt ceiling as leverage.

“Usually, the debt limit hike is more of a rhetorical than substantive debate, a painful vote that has to be done but nothing more than an opportunity to score political points,” Stanley said in an e-mail to Bloomberg. “This time, obtaining passage will be more complicated because it will be tied to substantive budget policy.”

To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net;