McConnell’s ‘Last-Choice’ Debt Plan Gives Markets Split Signals

Wednesday, 13 Jul 2011 10:45 AM

 

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Senate Minority Leader Mitch McConnell’s offer to hand President Barack Obama unilateral power to raise the national debt ceiling lent some market analysts confidence that the U.S. will avert default, while Senate Majority Leader Harry Reid today praised the plan.

In a move intended to put the burden on the White House to identify future spending cuts, the Kentucky Republican offered his “last-choice” plan as an alternative to deficit-reduction talks at the White House that have yielded no apparent progress.

“It would make it much easier to raise the debt limit, which should reassure markets,” Gus Faucher, director of macroeconomics at Moody’s Analytics in West Chester, Pennsylvania, said in response to an e-mail today. “I haven’t heard of any market reaction yet but it does imply much greater willingness to make a deal, which is a positive.”

Mark Zandi, chief economist at Moody’s Economy.com, said markets are comforted, at least to a degree, with McConnell’s plan because it suggests that lawmakers recognize the gravity of a default.

“As soon as I heard that, I thought, well, that’s positive,” Zandi said in an interview.

Reid described McConnell’s proposal as a “thoughtful and unique proposal,” even as he called on both sides to pull together on a more ambitious deal.

“I’m heartened by what I read,” the Nevada Democrat said on the Senate floor today. “This is a serious proposal, and I commend the Republican leader for coming forward.”

Contrary View

Still, the absence of an agreement in Washington after several days of talks among congressional leaders and the president augurs a possible breakdown, said analyst Chris Krueger.

Even with McConnell’s alternative, “we are no closer to a deal, votes, or a raise in the debt ceiling with the sand continuing to run out of the hourglass,” Krueger, research analyst at MF Global Washington Research Group, said in a note to clients today. He said odds are 40 percent that Congress won’t pass a debt ceiling bill before the Treasury’s stated Aug. 2 deadline of raising the debt ceiling to avert a default in U.S. bond obligations.

McConnell offered little hope yesterday that leaders would reach an agreement by the necessary deadline.

“As long as this president is in the Oval Office, a real solution is unattainable,” he said on the Senate floor in his toughest comments about the negotiations since the talks began. He dismissed Obama’s call to lower the deficit by $4 trillion over the next 10 to 12 years as “smoke and mirrors.”

Three-Stage Proposal

McConnell’s proposal to let the president increase the debt limit in three stages, while requiring him to propose offsetting spending cuts, offered a potential path out of the impasse over addressing the nation’s long-term debt that has brought the government within weeks of a default. It also signaled that the issue may continue to loom during next year’s election campaign if Congress is forced to take additional votes on the debt ceiling.

Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $80 billion in assets, said the idea demonstrates movement toward “a coming together of the two sides in something of a solution. Maybe not the solution we were looking for, but at least it’s an aversion of the D-Day mess.”

Backlash Against McConnell

Still, McConnell’s plan drew a backlash from conservatives -- former House Speaker Newt Gingrich called it “an irresponsible surrender” -- and it wasn’t clear whether it could pass the U.S. House.

“I don’t know that,” Speaker John Boehner told Fox News, according to a release from the network. “Senator McConnell said it’s a last-ditch backup plan. When we get here a couple weeks from now, we may be looking for all kinds of ideas.”

Senator Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, suggested today that he was opposed to McConnell’s plan.

“I’m personally for cut, cap and balance,” Hatch said in a Bloomberg Television interview. “We should cut spending,” cap it to the 2008 level and pass a constitutional amendment to balance the budget.

“If we don’t do that, these people will continue to spend us blind,” Hatch said.

White House press secretary Jay Carney called McConnell’s remarks on the Senate floor criticizing Obama’s commitment to reining in the debt “unfortunate,” saying, “This president is going to be in office for at least another 18 months, and I think that the American people expect Congress to work with him.”

White House Meetings

Obama and congressional leaders met yesterday for almost two hours at the White House yesterday, the third day in a row of deficit negotiations. Officials from both parties said there was little progress toward resolving differences between Republicans, who oppose any tax increases, and Democrats, who won’t agree to cuts in Social Security or Medicare benefits without additional tax revenue. They are scheduled to meet again today at 4 p.m.

Both the White House and House Republican leaders avoided embracing or rejecting McConnell’s debt-limit proposal.

Carney said the idea “reaffirmed what leaders of both parties have stated clearly, that defaulting on America’s past due bills is not an option.” He added that Obama is focused on “seizing this unique opportunity to come to agreement on significant, balanced deficit reduction.”

Boehner, an Ohio Republican, said in the Fox News interview that “there are other ideas out there.”

Warning from Obama

The lack of movement on the debt negotiations drew warnings from Obama and the business community.

The president said on “CBS Evening News with Scott Pelley” that unless the debt ceiling is raised in time, the federal government might not be able to pay Social Security and veterans’ benefits.

“I cannot guarantee that those checks go out on Aug. 3 if we haven’t resolved this issue,” Obama said. “Because there may simply not be the money in the coffers to do it.”

That drew a strong rebuke from Hatch today.

“The president’s threatening to pull Social Security checks, veterans’ checks, Army personnel checks -- gimme a break,” he said in the Bloomberg interview. “We’ve got about $2.2 trillion coming in” to the Treasury.

Business Leaders’ Letter

The U.S. Chamber of Commerce, the Business Roundtable and other organizations yesterday released a letter to Obama and Congress urging action “to raise the debt ceiling as expeditiously as possible.”

The letter, which the chamber said was signed by 470 chief executives, supports long-term efforts to reduce federal deficits while saying that failure to increase the government’s borrowing authority “would create uncertainty and fear, and threaten the credit rating of the United States.”

McConnell said his plan is intended to “do the responsible thing and ensure the government doesn’t default on its obligations.”

The proposal would let the president increase the limit in three steps unless Congress disapproves by a two-thirds majority -- a near impossibility with the Senate controlled by the Democrats -- while Obama would also be required to offer spending reductions. Those cuts would be advisory, and the debt- ceiling increase would occur regardless of whether lawmakers enact the cuts, McConnell said.

Onus on Obama

Don Stewart, a spokesman for McConnell, said the plan would let Obama raise the debt limit while putting the onus on him and congressional Democrats to cut spending.

At the same time, Republicans wouldn’t have to agree to tax increases. The proposal would force Democrats to cast multiple votes to raise the debt ceiling before the next election, while giving Republicans the chance to vote against that without risking a default.

The proposal is “not my first choice,” McConnell told reporters.

The increases would come in amounts of $700 billion, $900 billion and $900 billion, McConnell said. They would occur over the remainder of Obama’s presidential term, in keeping with the president’s call for an increase in the debt limit that would carry through the 2012 elections.

Fiscal Conservatives Concerned

Some fiscal conservatives expressed alarm, suggesting the plan undercuts Republican demands that any debt-ceiling increase be accompanied by a budget overhaul.

Gingrich, who is seeking the Republican presidential nomination in 2012, said in a posting on Twitter that McConnell’s plan is “an irresponsible surrender to big government, big deficits and continued overspending.”

Still, Grover Norquist, head of the anti-tax Americans for Tax Reform, said the Republican leader’s proposal was an acceptable “fallback plan”

Norquist said the requirement that Obama accompany a debt- limit increase with a list of proposed spending cuts would accomplish “an incredibly important thing” by “smoking out” Obama on how he would cut the budget.

“If he presents a phony plan, the world can see and we go into the 2012 election and deal with those Democratic senators and president who didn’t take this seriously,” added Norquist, who has said most House and Senate Republicans have signed a pledge he distributes vowing not to raise taxes.

Patrick Griffin, who was President Bill Clinton’s chief congressional lobbyist from 1994 to 1996, said McConnell’s proposal shows the Republican leader’s leverage in the negotiations is slipping.

“I would read it as weakness, at least on McConnell’s part,” Griffin said. “He blinked.”

© Copyright 2014 Bloomberg News. All rights reserved.

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