Republicans, Democrats digging on the debt after S & P Outlook Cut

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April 18, 2011, 6: 07 PM EDT By Julie Hirschfeld Davis

(Updates with comments from Warner in 14th paragraph, Corker in 17, 18th paragraphs.)

April 18 (Bloomberg) — Republicans and Democrats in Congress, divided over dealing with the nation's debt, used today's decision by Standard & Poor's to lower the U.S. credit outlook to "negative" to bolster their competing arguments about addressing the government's finances.Democrats argued the S & P's revision helps make the case for a broad agreement based on the debt-cutting plan President Barack Obama outlined last week. Republicans said the ratings firm's report reinforces their call for deeper spending cuts than the president and other Democrats have been willing to consider."Charles Schumer of New York, the Senate's third-ranking Democrat, said bipartisan agreement exists on the need to reduce the debt by $4 trillion over roughly the next decade.""now we just need to resolve how to do it," Schumer, who is traveling in Asia during a two-week congressional break, said in a statement. Obama's "balanced plan - which related on shared sacrifice, as opposed to simply ending Medicare - makes a long-term deal highly possible," the senator said.Republicans have proposed scaling back entitlement programs such as Medicare and reject Obama's push for tax increases to help reduce debt.'Wake-up Call'House Majority Leader Eric Cantor, a Virginia Republican, called the S & P warning "a wake-up call for those in Washington asking Congress to increase the debt limit blindly" without significant spending cuts.The negative outlook on long-term U.S. debt issued by S & P "makes clear that the debt-limit increase proposed by the Obama administration must be accompanied by meaningful tax reforms that immediately reduce federal spending and stop our nation from digging itself further into debt""," Cantor said.Congress is facing a vote as early as next month on the government's raising $14.29 trillion legal debt limit. The Treasury Department projects that it will hit the cap on May 16, though it could use emergency measures to avoid default until about July 8.Obama and members of his economic team have said that failure to approve an increase could have catastrophic consequences for the U.S. economy and financial markets.S & P's ConcernS & P revised the U.S. government's long-term outlook to negative on concern the White House and Congress will fail to reach agreement on cutting medium-and long-term debt.As part of the debate on the government's spending, which also includes hammering out a 2012 budget, Obama last week offered the outlines of a plan to slash the debt by $4 trillion over 12 years through a combination of spending cuts and tax increases.A group of six Republican and Democratic senators are trying to strike a compromise along the lines suggested by the two co-chairmen of a debt commission Obama set up last year. That plan called for trimming the budget by $3.8 trillion over a decade through a mix of spending cuts and tax increases."Members of the so-called Gang of Six said the S & P review shows the markets are watching for signs that policy makers are serious about confronting the issue debt.""I still believe we must act sooner rather than later, and we should work in a bipartisan way to cut spending, including defense spending, begin to strengthen and reform entitlement programs and implement tax reform," senator Mark warner of virginia, the democratic leader of the groupsaid in a statement. ' If we fail to take this seriously, and if our deficit and debt discussions turn into just another game of political brinksmanship, this could result in the most predictable economic crisis in our history. "'"Debt Crisis 'Senator Tom Coburn of Oklahoma, a Republican member of the group, said the S & P's change should create a sense of urgency for tackling"our debt crisis."""If we refuse to negotiate within our own government, we will soon find ourselves negotiating with foreign governments and the international financial community on terms far less favourable than we enjoy today," Coburn said in an e-mailed statement.Republican Senator Bob Corker of Tennessee said a proposal he is pushing to cap federal spending at 20.6 percent of gross domestic product within a decade should be a condition of any debt-limit increase, and that the S & P action increases the momentum for the move.Good Timing "I don't think any American likes seeing the outlook for our country's financial situation downgrade, but it couldn't come at a better time, if it had to happen, than now, when we're negotiating about how to get spending under control""," Corker said in an interview.Senator Lamar Alexander of Tennessee, the Senate's third-ranking Republican, said the S & P's revision reminds the president and Congress that "we must deal with Washington spending money that we don't have."Speaking in his home state, he said, "We can fix it, but we have to start now and have the political will to do it."Republican Representative Kevin Brady of Texas, vice chairman of Congress's Joint Economic Committee, said the move builds the case for a plan by Republican House Budget Committee Chairman Paul Ryan of Wisconsin. His proposal would slash spending by $6 trillion over a decade, in part by privatizing Medicare and capping Medicaid.Obama "needs to stop ridiculing Representative Ryan's plan, which begins to seriously address our country's long-term spending issues, and start supporting it as the best way forward""," Brady said.Dwindling ConfidenceRepresentative Jeb Hensarling of Texas, head of the House Republican Conference, said confidence in the U.S. economy is "sure to dwindle" when Obama "chooses to treat our national debt as campaign fodder and insists on more spending and more taxes."House Democratic Whip Steny Hoyer of Maryland said the S & P's decision "shows the urgent, bipartisan action needed to put our nation on a serious path to reduce deficits." It "demonstrates that Republicans cannot hold the debt limit hostage over partisan, divisive issues," he said.The revision is a "market-based signal that independent ratings agencies believe the U.S. is on an imprudent and unsustainable fiscal path and that action is needed in order to maintain investor confidence," said David Walker, a former U.S. comptroller general who heads the Comeback America Initiative, an independent, non-profit tax policy organization.Walker said in a statement that Obama and Congress must "work together to raise the debt ceiling limit and imposes tough statutory budget controls, including debt/GDP targets with automatic enforcement mechanisms that would take effect no later than fiscal 2014."

-With assistance from James Rowley and Brian Faler. Editors: Don Frederick, Laurie Asseo.

To contact the reporter on this story: Julie Hirschfeld Davis in Washington at Jdavis159@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva@bloomberg.net

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Obama J.l.Hobson for the fight with the Republicans on the debt limit

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April 10, 2011, 6:39 PM EDT By Brian Faler

(Adds interest-cost projections in 25th paragraph. See EXT6 for more on the budget.)

April 11 (Bloomberg) -- The struggle last week to avert a government shutdown may be little more than the warm-up for a much bigger battle in coming months over raising the debt limit.

The U.S. government is projected to slam into the $14.3 trillion legal cap on government borrowing sometime this spring. As the price of their vote to allow the government to go further into debt, congressional Republicans are demanding far deeper cuts than the $38 billion they got last week in the deal to fund the government for the last six months of the 2011 fiscal year.

Failing to raise the debt ceiling would have much more dire consequences than a shutdown, with Treasury Secretary Timothy Geithner predicting last week that it would “call into question the willingness of the government of the United States to meet its obligations,” and “shake the basic foundations of the entire global financial system.”

That is why Republicans see the vote as their best chance this year to force President Barack Obama to accept dramatic reductions in the federal budget, this time perhaps measured in trillions, rather than billions.

“I can tell you this: There will not be an increase in the debt limit without something really, really big attached to it,” House Speaker John Boehner, an Ohio Republican, said at an April 9 fundraiser in Connecticut.

Obama Plan

The Obama administration, which omitted plans for tackling the long-term deficit from its budget plan released just eight weeks ago, is now reversing course, promising to outline a plan this week for putting the government’s books in order. The president will address the nation April 13, an administration official said yesterday.

Obama will propose changes in Medicare and Medicaid as well as taxes and perhaps additional defense spending cuts, senior adviser David Plouffe said in interviews as he made the rounds of Sunday morning television talk shows in the wake of the fight over the funding for the remainder of this fiscal year.

The president will “lay out his approach this week in terms of the scale of debt reduction he thinks the country needs so we can grow economically and win the future, a balanced approach,” Plouffe said on Fox News Sunday. Obama, he said, will use a “scalpel, not a machete.”

Lawmakers can’t avoid raising the debt limit by simply cutting spending, Geithner warned last week in a letter to lawmakers. With the public debt growing by an average of $125 billion per month, Congress would have to cut $700 billion from this year alone, which would mean, for example, eliminating all discretionary spending.

‘Massive Shock’

Cutting that much, that soon would be a “massive shock” to the economy, Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said in an interview. “I don’t think there would be any question” that would tip the economy back into recession.

Lawmakers won’t have much time to work out an agreement. The government will hit the debt cap by May 16, according to the Treasury Department. After that, the government will be able use a number of accounting moves and other steps to stave off default, Treasury said, though by around July 8, it will be out of options.

Failing to raise the cap would reverberate throughout the economy, pushing up borrowing costs for the government as well as individuals and businesses, the administration says.

‘National-Security Interests’

Congress needs to raise the limit to maintain vital services and avoid “questions about our ability to defend our national security interests,” Geithner said in his letter to lawmakers. The U.S. would face sharply higher interest rates and would have to stop or delay payments to the military, retirees and others, he said.

“Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover,” he said.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said March 30 that companies, insurance funds and investors would lose access to markets if the U.S. appears to be headed toward a default related to its debt limit.

“If the United States actually defaults on our debt it would be catastrophic,” Dimon, 55, said at a U.S. Chamber of Commerce event in Washington.

Tea Party Promises

Votes to raise the debt limit are always difficult for lawmakers because their support for such measures makes it easy for their opponents to paint them as profligate spenders in campaign commercials. This year’s vote promises to be especially tricky with scores of Tea Party-backed freshmen, elected on promises to slash spending, who backed Boehner’s compromise last week on the promise that the debt limit would give them an opportunity to make a much bigger dent in the $1.4 trillion deficit.

What’s more, while neither the administration nor lawmakers have said by how much they would like to raise the cap, it will probably need to be increased by more than $1 trillion to accommodate borrowing through next year’s elections, which may leave some lawmakers with sticker shock.

Senator Charles Schumer of New York, the chamber’s third- ranking Democrat, warned yesterday against a repeat of last week’s brinksmanship over spending.

“Boehner had to keep these negotiations going until the last minute to show the Tea Party people he was doing everything he could,” Schumer said yesterday on CBS’s ‘Face the Nation.’ “You cannot do that with the debt ceiling -- that is playing with fire because if the markets believe we are not going to pay our debts, it could be a formula for recession.”

Bond Yields

For now, financial markets are giving lawmakers room to act. Bond yields are lower than when the government was running a budget surplus a decade ago even as Treasury Department data show that the amount of marketable debt outstanding has risen to $9.13 trillion from $4.34 trillion in mid-2007.

The benchmark 10-year Treasury note yield was at 3.58 percent on April 8, below the average of 7 percent since 1980.

Similarly, derivatives tied to government debt show investors’ perceptions of America’s creditworthiness are improving. Credit-default swaps on Treasuries stood 41.12 basis points as of late April 8 in New York, according to data provider CMA Datavision. The swaps are down from this year’s high of 51.5 basis points on Jan. 27 and last year’s high of 59.7 in February.

Borrowing Costs

Low borrowing costs mean the U.S. is spending less to service its debt as a percentage of gross domestic product. Interest expense fell to 2.7 percent of GDP in fiscal 2010 from 3.8 percent in 2001, when the U.S. had a budget surplus, according to data compiled by Bloomberg.

Still, interest payments on the federal debt will more than quadruple in the next decade, with projected costs topping the Pentagon’s 2017 budget of $622 billion, according to the Congressional Budget Office.

Though Republicans aren’t saying yet what exactly they will demand for their debt-limit votes, a number have begun offering ideas. All 47 Senate Republicans have endorsed a balanced budget amendment to the Constitution. House Republicans, meanwhile, are slated to vote this week on Budget Committee Chairman Paul Ryan’s plan to cut $6 trillion over the next decade, a proposal he’s said offers a menu of possible items to attach to a debt- limit hike. His plan also calls for tax cuts while the administration has proposed more than $1 trillion in tax increases.

Senate Minority Leader Mitch McConnell, a Kentucky Republican, laid down his marker April 8, after Congress narrowly avoided a government shutdown.

“In order to raise the debt ceiling, we need to do something significant about the debt,” he said. “My definition of significant is that the markets view it as significant, the American people view it as significant and foreign countries view it as significant.”

--Editors: Max Berley, Ann Hughey.

To contact the reporters on this story: Brian Faler in Washington at bfaler@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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