Faced with a ballooning public debt and dwindling legal authority to borrow further, the U.S. Treasury Department said Tuesday that it will cut back on near-term borrowing to avoid an extraordinary financial crisis at the end of the month.
Treasury Secretary Robert E. Rubin said that to avoid exceeding the legal debt limit of $4.9 trillion on Oct. 31, the government will scale back offerings of short-term bills next week and suspend certain borrowing from local governments.
Moreover, Rubin called on the Republican-led Congress to increase the debt limit rather than use it as a lever in the budget conflict with the White House, a conflict that some fear could lead to a financial "train wreck" later this year.
Pressuring Congress to take the "responsible course of action," Rubin said that the Administration might soon have to consider "a number of issues, many of which raise serious unresolved legal and practical questions, and all of which may have adverse consequences."
Rubin declined to elaborate. Most financial experts view the notion of a genuine U.S. default as unthinkable. In past debt-ceiling impasses, the federal government has taken such actions as running departments on skeleton crews and scaling down Treasury auctions to squeeze out temporary savings.
Yet the ongoing conflict has become an increasing source of friction between the Administration and Republicans in Congress, as well as a source of worry on Wall Street.
Sen. Pete V. Domenici (R-N.M.) was troubled by Rubin's use of the Oct. 31 debt-limit date, which conflicts with a mid-November date forecast by the Congressional Budget Office. Domenici said Republicans might hold joint House-Senate hearings on the issue and ask Rubin to appear.
The issue is a complicated one for the financial world, which is generally delighted at the prospect of tightening up the federal budget but also fears instability.
Just last week, when Gingrich warned of a lengthy budget stalemate barring "ironclad assurances" that the White House is willing to negotiate with Congress, the dollar slid on currency markets.
On Tuesday, some professional investors said they viewed the budget and debt struggle as a decidedly mixed picture.
"I think that U.S. investors sense there's gamesmanship here, but foreign investors take what happens in Washington very seriously," said David B. Bostian Jr., chief economist at Herzog, Heine, Geduld, a New York investment firm.
A debt impasse, he warned, could lead to a period of financial turbulence.
Besides publicly pressuring congressional leaders, Treasury officials acted on two fronts Tuesday to stave off the crisis.
One move was to suspend indefinitely any applications by state or local government for a type of Treasury security that the local entities may use to refinance their own debts, known as the State and Local Government Series. For example, a state board of education that has issued bonds for new school construction might refinance the debt at a lower interest rate by purchasing these securities.
Last year, the Treasury Department issued $17 billion worth of this series of non-marketable securities.
The other was to "significantly" reduce next week's auction of three-month Treasury bills, although officials did not say what the size of the auction would be. Past offerings have tended to coincide with the amount of outstanding Treasury bills maturing that same week, a figure that next week will be in the range of $25 billion.
"These specific actions we took today may sound nerdy and technical, but they're really very significant, we think," said one Treasury official, noting that they would help the nation barely avoid hitting the debt ceiling for at least several days.
Earlier Tuesday, White House Chief of Staff Leon E. Panetta said that President Clinton will veto any balanced-budget bill that contains unacceptable spending and tax cuts, including one that increases the debt limit.
"Those steps that the [Treasury] secretary is announcing today should not be necessary if the Congress would do its job and extend the debt ceiling," Panetta said. "Ultimately, all of us agree that it is not healthy for a country that is now enjoying an economic recovery to raise question marks about our ability to meet our debts."
Congressional Republicans have linked the debt-ceiling issue to the huge spending bill that is intended to balance the budget over seven years and provide $245 billion in tax cuts. It is the same legislation that would slash $270 billion from the projected growth in Medicare and contains many other provisions that are unpopular with the White House.
If the ceiling is not raised, the government cannot finance deficit spending and could be in technical default for the first time in history.
Panetta said Republicans, in failing to act on the debt-ceiling extension, are creating an "atmosphere of instability with regard to what we do on our debt and what we do with regard to the bond markets."
"I think that is dangerous. They are playing with fire, and we ought not to do that," Panetta said.
The White House was prepared to negotiate with Republicans on a balanced-budget compromise plan but had received clear signals last week they did not want to talk, Panetta maintained.
On Wall Street, financial experts were generally calm--if for no other reason than the fact that a U.S. default could hold unimaginable financial consequences for the world.
"I doubt if they would risk bringing the system to a collapse," said Michael Metz, chief investment strategist at Oppenheimer & Co. "It just doesn't make any sense to me."