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US May Default on Debt by June 28
Treasury will tap federal employee retirement funds 
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Dateline: 05/17/02

The United States government will, for the first time in its history, fall into financial default on June 28 unless Congress acts before then to raise the legal limit on the national debt.

The June 28 deadline was announcement earlier this week by Treasury Secretary Paul H. O'Neill, who had previously not set a deadline by which Congress needed to increase the current $5.95 trillion debt limit. Should the national debt exceed the debt limit, the government is considered in default and loses its ability to borrow money necessary to keep the government running and pay the interest due on debt. President Bush's budget projects that the national debt could rise to $6.099 trillion at the end of fiscal year 2002 and to $6.489 trillion at the end of 2003.

Since December, Treasury Secretary O'Neill has recommended that Congress pass legislation increasing the debt limit to $6.7 trillion, but Congress has resisted. The fiscal year 2002 supplemental spending bill, currently being completed by the House Appropriations Committee, could now be used as the vehicle for increasing the debt limit. 

After exercising stopgap measures to keep the national debt under the limit since April, the Treasury announced on May 15 that it would now be forced to move some $80 billion from the Federal Employees Retirement System interest-bearing account known as the G-Fund into non-interest bearing accounts.

The juggling of federal retirement funds will not endanger federal employees' retirement nest eggs, according to Treasury officials who say all lost interest payments to the retirement funds will be made up over coming months. A similar action was necessary in 1995 when President Clinton and Congress reached an impasse over budget matters.

How and Why Does the Government Borrows Money?
The federal government borrows money through the sale of Treasury bonds to financial institutions and individual investors. The Treasury bonds are then paid off, plus interest to the buyers, over a set period of time. 

The government has to borrow money because it does not collect enough in taxes and fees to pay for all of the government programs funded each year by Congress in the budget process. This practice is called "deficit spending."

Money borrowed through the sale of Treasury bonds is used by the government either to help pay for programs in its operating budget or to buy back previously issued bonds.

The National Debt is the combined total of money borrowed by the government to cover deficits, plus all the interest owed on the borrowed money.

How Could This Hurt Taxpayers?
If the government can simply "allow" itself to sell more bonds and borrow more money simply by passing a law, why is the Treasury worried about exceeding the debt limit? 

At stake is the "Full Faith and Credit" of the United States. Full Faith and Credit refers to a nation's ability to pay its bills on time, no matter what. It is the main indicator to the world community of a nation's economic stability. The Full Faith and Credit of the U.S. has never before been questioned by the world's investors. The Treasury Department is concerned that exceeding the statutory debt limit and falling into default could make investors doubt the strength of the U.S. economy and become reluctant to buy bonds.  The result, say Treasury officials would be increased costs to taxpayers for financing essential government services.

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