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U.S. Treasury warns of debt cap impact on markets, cyber readiness

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(Reuters) — The U.S. Treasury warned on Wednesday that a brush with the threat of default could leave government finances more vulnerable to cyber attacks, while also putting a squeeze on debt markets.

The federal government is currently scraping just under its $18 trillion legal debt cap, with political wrangling over fiscal policy putting Washington at risk of not being able to pay its bills.

The Treasury came close to missing payments in 2011 and 2013, when Congress delayed increasing the borrowing limit.

The Treasury now will have to reduce the government's cash buffer in the coming months as it runs out of room under the debt ceiling, Acting Assistant Secretary for Financial Markets Seth Carpenter said in a statement.

The department announced in May that it would try to hold larger cash balances daily to be ready for any disruptions to the financial system, such as a cyber attack or major storm.

Holding a bigger cash buffer would help the government pay bills, including debt payments, if a cyber attack interfered with the debt auctions the government regularly holds to raise money.

“Unless Congress raises the debt limit, we expect that Treasury's cash balance will fall below the minimum prudent level,” Mr. Carpenter said, noting that the larger buffer had aimed to address “emerging threats such as potential cyber attacks.”

He also said closing in on the debt ceiling would lead the Treasury to reduce issuance of short-term debt securities, known as bills.

That could run counter to another Treasury goal of trying to keep markets functioning well, which the Treasury does by issuing the kinds of securities investors want.

“There's a possibility that the market could be strained,” Mr. Carpenter told reporters at a news conference.

Demand has risen in recent years for bills, a development many investors attribute to tighter regulations enacted after the 2007-09 financial crisis that require many institutions to hold more low-risk and liquid securities.

The Treasury is taking measures, including a suspension of investments in a number of public worker pension funds, that allow it to roll over its debts without breaching the borrowing ceiling.

Mr. Carpenter repeated the Treasury's view that these measures should last through late October and likely at least a little longer.