The ongoing fiscal crisis in the US is likely to worsen soon with the treasury expected to run out of funds soon. The US treasury is expected to face great difficulties in meeting its obligations from around the Valentine’s Day, according to a Washington based think tank.
Founded by former senators of the Republican and the Democratic parties, the Bipartisan Policy Center or BPC has released a report saying that Washington is expected to run out of funds earlier than expected and the so called X-date has been moved earlier to February 15. The report prepared by Steve Bell, Shai Akabas, Loren Adler and Brian Collins states the US has already hit the borrowing limit on the eve of the New Year and has been surviving by tapping funds from various sources.
The US government has managed to meet its obligations and fund operations in the New year by using the $200 billion fund of emergency borrowing money, the report mentions. As part of extraordinary measures aimed at allowing normal functioning of the government funded operations, the US treasury is temporarily reducing the debt held under the federal employee retirement fund or the G-fund. The aim is to free up the debt limit and issue additional securities to the public to raise funds which will then be used to meet federal government obligations.
However, the government will have to reimburse the retirement fund by paying both the principal as well as the interest amount, once its debt limit is raised back, the BPC points out. The US government had earlier resorted to the use of such extraordinary measures in 2011 for improving its ability to meet obligations from May 15 to August 2 when the current debt crisis was initiated. However, the current measures are not expected to benefit the government for such a long time, the analysts at BPC have warned.
The report also warns that once the US government exhausts all its emergency borrowing authority, it can fund its operations only through the available cash which is actually the leftover amount from the borrowed funds and the daily tax revenues.
Although the treasury department has several means for paying off its obligations, none of them will be left if the country reaches its debt limit and Congress does not take any action. Consequently the country will start defaulting on its obligations any time between February 15 and March 1.
According to BPC estimates, the government is estimated to have tax revenues of $9 billion as compared to total obligations of $52 billion. The debt obligations include interest payment on Treasury and IRS refunds, salaries and benefits of federal employees, Medicare, Mediaid, payments to defense contractors, low income housing and food stamps and unemployment payments etc. The government is unlikely to meet its obligations even for a single day after February 15, the report mentions.
The government has already ruled out the option of privatizing assets to meet its obligations during the crisis period while deeming several other ideas as impractical or inappropriate. Even the Federal Reserve chairman Ben Bernanke has said that unless the Congress cuts spending it will have to take rash decisions about which obligations to meet and which to defer on a daily basis. This in turn will restrict the chances of recovery, Bernanke says.
Although the US government is unlikely to default on its interest payment to investors, payment to federal workers and various federal programs is likely to be impacted, the BPC report says. The only solution lies in the US government attempting to boost its tax revenues by expanding the base and not the rates. Also the Congress needs avoid raising the borrowing limit again and again.