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U.S. Flirting With Another Debt Downgrade

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U.S. Supercommittee Flirts With Failure

By Heidi Przybyla - Oct 27, 2011


The congressional supercommittee seeking a long-term debt-reduction deal remains at an impasse with a deadline near, and the prospect of failure is prompting concern about further downgrades of the nation’s credit rating.


With the committee heading into what may be a make-or-break week for striking a deal over a package of at least $1.2 trillion in U.S. deficit cuts, members are deadlocked over Democrats’ insistence on tax increases, according to committee aides in Washington who spoke on condition of anonymity.


Senate Finance Committee Chairman Max Baucus proposed a deficit-reduction plan worth almost $3 trillion with about half comprised of tax increases, according to a congressional aide. The remainder would be spending cuts, including in Medicare and Medicaid, as well as fee increases, the aide said. Republicans rejected the plan, which Senate Democrats wanted to pair with extensions of a payroll tax break and jobless benefits scheduled to expire at the end of this year, the aide said.


“They’re gridlocked,” Greg Valliere, chief political strategist at the Potomac Research Group, said in a Bloomberg Television interview. “The level of partisanship is really about to ratchet up.” Valliere added that “if the supercommittee fails or just does half a loaf, then I think it’s not just S&P, the other agencies as well could take us down a notch.”


Pressure on Rating


Debt-limit negotiations that dragged through June and July led to the Aug. 5 decision by Standard & Poor’s to downgrade U.S. government debt from the top AAA level. The deal lawmakers reached to raise the borrowing limit directs the supercommittee to recommend a debt-reduction plan by Nov. 23 and for Congress to approve it by Dec. 23. Failure to do so would trigger $1.2 trillion in across-the-board domestic and defense spending cuts.


If the panel can’t reach agreement and Congress thwarts the automatic cuts, the U.S. could face additional downgrades, John Chambers, a S&P managing director, said in a telephone interview yesterday. “If it gets watered down, that puts downward pressure on the rating,” he said.


Several supercommittee members spoke at a hearing yesterday about the risks of falling short of an agreement, while others questioned whether it would be possible to alter the automatic spending cuts.


“Every day we hear more and more about what the effects of failure would be on our nation’s long-term fiscal health and creditworthiness,” said Senator Patty Murray, the 12-member panel’s co-chairman and a Washington Democrat.


Time Running Short


The supercommittee has held most of its meetings in private and given little public indication that a deal is in the making.


Congressional Budget Office Director Doug Elmendorf told the panel that members need to find agreement by the first week of November to give his agency enough time to measure the savings of any large-scale plan.


“Lawmakers have already taken significant steps to constrain discretionary spending,” Elmendorf said. Such programs account for less than 20 percent of the federal budget.


Total discretionary funding in 2011 was the lowest, as a share of gross domestic product, since 2002, and a new budget law established spending caps for the fiscal years 2012 through 2021, said Elmendorf.


The hearing, the first in a month, replayed the longstanding conflict between Democrats pushing for tax increases and Republicans who want to find cuts in entitlement programs such as Medicare.


Seeking Revenue


Democrats pressed their case for a “balanced approach” to debt reduction that includes new tax revenue that ends preferences for upper-income earners. Murray said if the committee focuses only on lowering additional discretionary spending “we would still face deficits of hundreds of billions of dollars because we haven’t touched entitlements and revenues.”


“We’ve got to deal with the revenue issue,” said Maryland Democratic Representative Chris Van Hollen. “We all know that in the past decade when folks at the very top were paying a little more the economy performed just fine,” he said. “It seems to me this is a time for shared responsibility.”


Republicans are dug in against the Democrats’ revenue demands.


Representative Dave Camp, chairman of the tax-writing House Ways and Means Committee, said in a Bloomberg Television interview that he opposed a previous debt-reduction proposal by President Barack Obama’s debt commission because it included “high revenue levels.” The leaders of that panel will testify before the supercommittee on Nov. 1.


Pentagon Cuts


Some Republicans also have voiced concern about the prospect of reducing defense spending.


Camp, a Michigan Republican, asked Elmendorf if there are any barriers to Congress changing how the cuts to Pentagon programs would take effect.


“Any Congress can reverse the actions of a previous Congress,” said Elmendorf.


The S&P’s Aug. 5 downgrade of U.S. debt to AA+ from AAA came amid partisan wrangling over the debt limit. The ratings company said the government is becoming “less stable, less effective and less predictable.”


Even so, the government’s borrowing costs fell to record lows as Treasuries rallied. The yield on the benchmark 10-year Treasury note fell from 2.56 percent on Aug. 5 to below 1.72 percent on Sept. 22. The yield on the 10-year note was at 2.20 percent yesterday in New York.


Affirming Ratings


Moody’s Investors Service and Fitch Ratings have affirmed their top rankings on U.S. credit, and investors have shown increasing confidence. The cost of insuring U.S. government debt against default, as shown by credit default swaps on Treasury securities, has declined since early August to become the cheapest among the Group of 10 nations.


Leaders outside the committee are sounding less than confident as the deadline for recommendations approaches.


“Look, I’m not optimistic, I’m hopeful,’” House Democratic Minority Whip Steny Hoyer of Maryland told reporters on Oct. 25.


A Bank of America Merrill Lynch report released Oct. 21 said the U.S. likely will be downgraded again by a major credit- rating agency by the end of this year if the supercommittee fails.


“We expect at least one credit downgrade in late November or early December when the supercommittee crashes,” Merrill Lynch North American economist Ethan Harris wrote.


To contact the reporter on this story: Heidi Przybyla in Washington at


To contact the editor responsible for this story: Mark Silva at


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You can bank on another downgrade. Did anybody really expect this committee to do anything before they were up against a hard deadline?


Maybe they can forward some feel good debt proposal like the europeans did. :dismay:

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I find it funny that everybody's attention is focused on poor Italy.


Some food for thought:


Italian debt + unfunded pension liabilities divided by Italian GDP: 300%.


US debt + unfunded pension liabilities divided by US GDP: 600%.


By unfunded pension liabilities, I mean what Medicare and Social Security will need to collect, in today's dollars, over the actuarial time horizon in addition to what's expected to come in (this is recognized as debt by economists).


In plain English, the US is more heavily leveraged (debt in relation to income) than Italy. 


But suddenly Italy is the bad guy going bust.

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But suddenly Italy is the bad guy going bust.


I wouldn't say "bad guy" - obvious bowling Pin.


The potential for the collapse of the Eurozone is alarming.


While we have nauseating debt to gdp levels, our economy is a bit more centralized.


Imagine if we were a confederation under 1 central bank, and each one of the 50 legislatures must reach quorum to allow any kind of debt reduction plan to go into effect?


This is what is happening with the EU.


It is like being married to 27 Real New Jersey Housewives and expecting a harmonious outcome...


I have to focus on Europe, because it's my bread n butter - or Pane e' Burro if you will...

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Well, a downgrade by Moody's is in the cards, based on what we're hearing from D.C. today.


The US CBO needs details of the deficit reduction plan today.  That deadline will not be met.


The real fun will occur when the US renegs on the automatic budget cuts previously agreed upon. 


Stay tuned.

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