US Treasury to halt state, local securities sales

(Updates with latest debt, slugs issuance figures)

By David Lawder

WASHINGTON, Sept 21 (Reuters) - The U.S. Treasury on Friday said it would suspend sales of state and local government series securities (SLGS) next week to help prevent the federal government from breaching its statutory debt limit.

The move to close the "slugs" window again is the first of several emergency measures the Treasury can take to gain more precise control of federal finances as it nears the $8.965 trillion debt limit.

U.S. Treasury Secretary Henry Paulson this week said the government will hit the debt limit on Oct. 1 and urged the U.S. Senate to quickly approve an $850 billion increase in borrowing authority. Sales of the state and local securities typically resume when the debt limit is increased.

Next week's closure will be the fifth time that the Bush administration has closed the slugs window to avoid breaching the debt limit before Congress raised its credit authority.

As of Thursday, the federal debt stood at $8.903 trillion, about $62 billion below the limit. If the government exceeds the limit, it could risk a default on its obligations.

The Treasury said it will stop accepting subscriptions for new slugs after 3 p.m. EDT (1900 GMT) on Sept. 27. It sells them to state and local governments and other municipal borrowers for the temporary investment of proceeds from their tax-exempt bond sales.

The securities are popular because they ensure that municipal borrowers stay within Internal Revenue Service restrictions that limit earnings from bond proceed investments to the original interest rate on the bonds.

But because they are typically issued upon demand from state and local governments, the Treasury has less control of day-to-day borrowing amounts. By closing the slugs window, the Treasury can better estimate its cash flow.

Through Thursday, the Treasury had issued $4.2 billion in slugs during September. It issued $132.2 billion during the first 11 months of fiscal 2007, or an average of $12 billion a month.

U.S. Senate Budget Committee Chairman Kent Conrad on Thursday said Congress would pass legislation lifting the debt limit "in a very timely manner." The North Dakota Democrat said he wanted to avoid uncertainty for jittery financial markets caused by disruptions in government borrowing.

Other emergency measures the Treasury can take to stay under the credit ceiling include temporarily diverting money from several federal employee pension and disability funds and dipping into the Exchange Stabilization Fund, a seldom-used pool of money earmarked to stabilize currency rates.