Obama Says Markets Don’t Doubt U.S. Ability to Pay Its Debts After S&P Cut
President Barack Obama
Andrew Harrer/Bloomberg
U.S. President Barack Obama speaks about the downgrade of federal debt on Monday.
U.S. President Barack Obama speaks about the downgrade of federal debt on Monday. Photographer: Andrew Harrer/Bloomberg
Aug. 8 (Bloomberg) -- President Barack Obama speaks about Standard & Poor's downgrade of its U.S. credit rating. Obama also discusses the helicopter crash in Afghanistan that killed 30 U.S. soldiers on Aug. 6. (Source: Bloomberg)
Aug. 8 (Bloomberg) -- Glenn Hubbard, dean of Columbia University's Graduate School of Business, talks about Standard and Poor's decision to downgrade U.S. credit rating to AA+ from AAA and the impact on the economy. Hubbard, speaking with Lisa Murphy and Adam Johnson on Bloomberg Television's "Fast Forward," also discusses the European Central Bank's plan to purchase government bonds of distressed nations. (Source: Bloomberg)
President Barack Obama, breaking his silence on the downgrade of federal debt, said the U.S. “always will be a AAA country” and that he’ll release new recommendations to deal with the deficit in the coming weeks.
The main obstacle facing the U.S. is the “lack of political will in Washington” to shrink the country’s long-term deficit and foster economic growth, Obama said at the White House in his first public comments since Standard & Poor’s lowered the credit rating on U.S. debt to AA+ from AAA on Aug. 5.
The debt downgrade, which has contributed to the worst stock market slump since 2008, is “not so much because they doubt our ability to pay our debt,” but because, after a month of wrangling, the rating service “doubted our political system’s ability to act,” Obama said. Gridlock “has not been constructive,” he said.
“Markets will rise and fall, but this is the United States of America,” Obama said. “No matter what some agency may say, we’ve always been and always will be a AAA country.”
The Standard & Poor’s 500 Index retreated 6.7 percent to 1,119.51 at 4 p.m. in New York, and the Dow Jones Industrial Average slid 634.76 points, or 5.6 percent, to 10,809.85. Yields on 10-year notes fell 22 basis points, or 0.22 percentage point, to 2.34 percent at 3:01 p.m. in New York, according to Bloomberg Bond Trader prices. Two-year yields fell to a record low.
Fannie and Freddie
Equities extended losses after the ratings cut prompted S&P to also lower debt rankings on Fannie Mae, Freddie Mac and other lenders backed by the government.
White House press secretary Jay Carney said after the president’s remarks that the administration “could not have been clearer” about the threat of a downgrade if lawmakers didn’t produce a sufficient compromise.
Obama renewed his call to renew the temporary cut in payroll taxes for workers “as soon as possible” and to extend unemployment insurance. He also called for changes in the tax code that would involve asking the wealthy to pay more.
The administration has tried to reassure global investors that money put in U.S. Treasury investments is safe and that the government’s ability to repay its debt hasn’t changed since the downgrade.
While Obama’s allies blamed a faction of congressional Republicans for scuttling a bigger deal on cutting the deficit, Republicans said the president bore responsibility.
‘He’s Failing’
Senator Lindsey Graham, a South Carolina Republican, said yesterday on CBS Television’s “Face the Nation” program that Obama never offered a plan to lead the country out of unsustainable budget deficits.
“He’s had a chance,” Graham said. “We’re three years into this. And he’s failing.”
Obama said S&P’s action should give “a renewed sense of urgency” to the work of a so-called super committee that’s being set up as part of an agreement to raise the national debt ceiling that Obama signed on Aug. 2.
Congressional leaders have until Aug. 16 to name the group’s members -- the two top Republicans and Democrats in the House and Senate each will name three -- and have already disagreed about whether revenue increases, and not just spending cuts, should be on the table in the panel’s discussions.
Budget Cuts
The law cuts $917 billion from spending over the next decade. The super-committee will try to come up with at least an additional $1.2 trillion in deficit reduction. If not, a trigger mechanism would kick in, which would reduce spending equally in defense and domestic programs.
In downgrading U.S. debt, S&P said it considered the plan inadequate. It “falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” the company said in a statement on Aug. 5.
The debt plan also drew opposition from lawmakers and interest groups on both ends of the political spectrum, with Republicans and their allies arguing that it didn’t do enough to slash spending and rein in the debt and Democratic-leaning groups saying it savaged programs for the most vulnerable without asking the wealthy to pay higher taxes.
“Republicans have demonstrated this problem can be solved without job-destroying tax hikes,” House Speaker John Boehner said in a statement. The special committee will have to make “tough choices” to rein entitlement programs, he said.
Obama said he would come up with his own set of proposals for a deficit deal by the congressional committee and pledged his administration’s “full cooperation” with the panel.
‘Very Specific’
Carney said at his briefing today that Obama “will be very specific in his proposals” for cutting the deficit. He said it would be based on the work of several public and private commissions, including the panel on deficit reduction the administration set up last year, and the framework of the initial “grand bargain” the president negotiated with Boehner.
S&P’s decision on U.S. debt was at odds with the other two main ratings services, Moody’s Investors Service and Fitch Ratings. Both affirmed their AAA grades on U.S. debt on Aug. 2, when Obama signed an increase in the U.S. debt ceiling and a plan to trim the nation’s deficit.
The new rating is the second-highest and puts the U.S. on the same level as Belgium and New Zealand, and above Japan and China. Under S&P’s definitions, debt rated AA is barely different from AAA securities and shows that a borrower’s ability to “meet its financial commitment on the obligation is very strong.”
To contact the reporter on this story: Roger Runningen in Washington at rrunningen@bloomberg.net; Margaret Talev in Washington at mtalev@@bloomberg.net
To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.
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