Debt Limit Impasses

During the 2013 debt limit impasse, investors reported taking the unprecedented action of systematically avoiding certain Department of the Treasury (Treasury) securities -- those that matured around the dates when Treasury projected it would exhaust the extraordinary measures that it uses to manage federal debt when it is at the limit. Because of this, disruptions to the Treasury market from the 2013 debt limit impasse extended into other markets, such as short-term financing. This report examines the effect of delays in raising the debt limit in 2013 on (1) the broader financial system and (2) Treasury debt and cash management, and (3) examines alternative approaches to delegating borrowing authority that could minimize future disruptions. Tables and figures. This is a print on demand report.

The gross federal debt, which represents the federal government's total outstanding debt, consists of debt held by the public and debt held in government accounts, also known as intragovernmental debt. Federal government borrowing increases for two primary reasons: (1) budget deficits and (2) investments of any federal government account surpluses in Treasury securities, as required by law. Nearly all of this debt is subject to the statutory limit. Treasury has yet to face a situation in which it was unable to pay its obligations as a result of reaching the debt limit. In the past, the debt limit has always been raised before the debt reached the limit. This book examines the possibility of the federal government reaching its statutory debt limit and not raising it, with a particular focus on government operations. First, the book explains the nature of the federal government's debt, the processes associated with federal borrowing, and historical events that may influence prospective actions. It also includes an analysis of what could happen if the federal government may no longer issue debt, has exhausted alternative sources of cash, and, therefore, depends on incoming receipts or other sources of funds to provide any cash needed to liquidate federal obligations. A discussion of the effects that prior debt limit impasses have had on the economy is also included. Finally, this book lays out considerations for increasing the debt limit under current policy and what impact fiscal policy could have on the debt limit going forward.

DEBT LIMIT: Market Response to Recent Impasses Underscores Need to Consider Alternative Approaches

We use the 2011 and 2013 U.S. debt limit impasses to examine the extent to which investors react to a heightened possibility of financial contagion. To do so, we first model the response of yields on government debt to a potential debt limit "breach. " We then demonstrate empirically that yields on all Treasuries rose by 4 to 8 basis points during both impasses, while excess yields on bills at risk of delayed principal payments were significantly larger in 2013. Perhaps counterintuitively, our model suggests market participants placed a lower probability on financial contagion resulting from a breach in 2013.

In 2011, the federal gove ...

The Joint Economic Committee (JEC), based in Washington, D.C., presents the full text of a paper entitled "Planned Gridlock: The Clinton Administration Plan to Block Debt Limit and Balanced Budget Legislation," written by Christopher Frenze and published in October 1996. The paper discusses the results of an investigation of the Clinton Administration's planning for a debt limit/budget impasse that began in November 1995.