U.S. to Borrow Record This Quarter to Finance Deficit

Nov. 3 (Bloomberg) — The U.S. Treasury more than tripled its planned debt sales for this quarter to help finance a 2009 budget deficit that bond dealers advising the department estimate may swell to almost $1 trillion.

Borrowing needs are expected to rise to $550 billion in the three months to Dec. 31, compared with the $142 billion predicted in July, the Treasury said in a statement in Washington. That follows a $530 billion record in the July-September quarter.

The worsening credit crisis and sluggish economy are straining the country’s finances and will leave the winner of tomorrow’s U.S. presidential election facing the worst budget shortfall on record next year. The Treasury is scheduled to announce in two days plans to expand debt sales to fund the gap.

“The U.S. Treasury faces an unprecedented financing need,” said Goldman Sachs analyst Ed McKelvey, echoing a similar comment last week by Anthony Ryan, the Treasury’s acting undersecretary for domestic finance.

The Treasury acknowledged the fiscal year 2009 deficit is likely to be far above the $482 billion projected in July, citing a new survey of its primary dealers. The financial firms told the Treasury they expect a $988 billion shortfall for the current fiscal year, which began Aug. 1.

The department didn’t release its own estimate for the coming deficit, in keeping with its usual practice. The department did announce more than $1 trillion in borrowing that is taking place between July and December.

Quarterly Record

The quarterly borrowing figures announced today are each more than double the previous record — $244 billion in new marketable debt in the first three months of this calendar year.

“Economic conditions have deteriorated notably over the past few months,” Phillip Swagel, Treasury’s assistant secretary for economic policy, said in a statement. “It will take time for financial markets to stabilize and for credit market strains to ease.”

After improving for three straight years, the U.S. budget deficit deteriorated as a slowing economy hurt tax revenue and spending increased, reaching a record $455 billion shortfall in fiscal year 2008, which ended Sept. 30.

The Bush administration, which entered office in 2001 with a $127 billion budget surplus, in July predicted the next president faces a deficit totaling $482 billion in fiscal 2009. In early October, Congress passed a $700 billion bank rescue package that’s draining federal coffers and leading some analysts to forecast a deficit of $1 trillion for this year.

Dealer Estimates

Dealers expect the Treasury to borrow $1.4 trillion in marketable debt during fiscal year 2008, with estimates spanning a range between $1.1 trillion and $2.1 trillion, according to the Treasury’s survey results announced today.

At its quarterly refunding announcement Nov. 5, the Treasury is likely to announce $25 billion in three-year notes, $20 billion in 10-year notes and $8 billion in 30-year bonds for its next refunding cycle, according to the median forecast of six economists surveyed by Bloomberg News.

The Treasury sells a variety of bills and shorter-term notes to meet the rest of its financing needs.

Ryan said last week that the Treasury plans to increase the sizes of its bill, note and bond auctions, and he repeated that officials are considering additional sales of three-year notes and other longer-term debt.

Ryan’s Speech

“Treasury may need to address many different policy objectives” with its financing program, Ryan told the Securities Industry and Financial Markets Association Oct. 28.

McKelvey projects the Treasury’s total 2009 borrowing needs at about $2 trillion.

The Treasury predicted three months ago it would borrow $171 billion in marketable debt in the July-to-September quarter and have a cash balance Sept. 30 of $45 billion. Today, the department said the actual amount it borrowed was $530 billion in the third quarter and the cash balance at the end of the period was $372 billion, including a supplementary financing program on behalf of the Federal Reserve.

At the end of the current quarter, the Treasury is predicting a cash balance of $300 billion. For the January-March period, the Treasury said it expects to borrow $368 billion, leaving a cash balance of $75 billion March 31.

Analysts said the Treasury’s estimates don’t account for an extension of its borrowing on behalf of the Fed.

“The actual borrowing could be much higher,” said Louis Crandall, chief economist of Wrightson ICAP. “The Treasury only projected its own borrowing. The programs the SFP is backing are authorized through next spring.”

Fed Program

For all of fiscal year 2008, which ended Sept. 30, the Treasury had a record net marketable borrowing of $760 billion, compared to $134 billion in 2007. For fiscal year 2008, the Fed redeemed $154 billion in U.S. government securities from its System Open Market Account, the Treasury said.

In July, the department estimated total marketable borrowing in fiscal 2008 would total $555 billion.

Before the Treasury’s announcement, analysts were predicting more red ink in coming quarters.

Ward McCarthy of Stone & McCarthy Research Associates in New Jersey said he’s expecting financing needs of $715 billion from October through December, followed by $320 billion in the January-March quarter. He predicted a $1.02 trillion 2009 deficit.

“All budget and financing projections should be considered to be fluid,” he said.

Goldman Sachs projected $400 billion in borrowing needs for the final three months of 2008, followed by $375 billion for the first quarter next year. Those estimates don’t, however, include borrowing for the Fed’s supplementary financing program, which has already borrowed $220 billion since Oct. 1, Goldman Sachs economists said in a research note.

The Securities Industry and Financial Markets Association is projecting a $687.5 billion budget deficit for fiscal year 2009, according to a survey of its members released Oct. 31.

To contact the reporter on this story: John Brinsley in Washington at [email protected]; Rebecca Christie at [email protected].

Last Updated: November 3, 2008 16:10 EST
By Rebecca Christie and John Brinsley

Source: Bloomberg