Obama Embarks on Tour to Sell Debt Plan, Not Dwell on S&P

Obama and the Deficit
U.S. President Barack Obama pauses while speaking during a town hall event at Northern Virginia Community College in Annandale, Virginia, on Tuesday, April 19, 2011. Photographer: Brendan Smialowski/Bloomberg

President Barack Obama began a tour promoting his proposal to cut long-term budget deficits with a new urgency after Standard & Poor’s said the nation’s AAA credit rating is in peril.

The divide between Republicans and Democrats in Congress over combating the nation’s debt was spotlighted by Standard & Poor’s lowering of the long-term U.S. credit outlook to “negative,” with each side saying the alert bolsters their competing arguments.

At a town hall-style meeting today in Annandale, Virginia, Obama said the nation’s mounting debt posed a threat to the strength of the economic recovery.

“Now that the economy has begun to grow again, if we keep on spending more than we take in, it’s going to cause serious damage to our economy,” Obama said at a gymnasium filled with students and faculty at Northern Virginia Community College.

Obama’s cross-country campaign-style swing is billed in part as an effort to build support for cuts in popular programs and he didn’t mention yesterday’s S&P report. Administration officials said they don’t expect him to refer to it unless he is asked.

Chris Lehane, a Democratic strategist who worked on Al Gore’s 2000 presidential campaign, said any president would prefer to minimize attention to an unfavorable assessment of the nation’s creditworthiness.

‘Political Paralysis’

Local newspapers and television stations would be likely to report “Wall Street questions U.S. long-term credit because of political paralysis in Washington,” Lehane said. “That’s not the headline you want when you’re looking at re-election.”

Obama is scheduled to spend three days traveling through states crucial to his 2012 re-election campaign to publicize his plan to reduce cumulative deficits by $4 trillion over 12 years. The plan includes spending cuts on defense and domestic programs and calls for raising taxes on the wealthy.

In Virginia, he said he was optimistic the White House could overcome differences with congressional Republicans to reach an agreement on the deficit, citing deals the two parties struck on tax cuts last December and government funding in April.

“I believe that Democrats and Republicans can come together to get this done,” Obama said. “Both sides have come together before. I believe we can do it again.”

Town-Hall Meetings

He will also hold forums on the deficit-reduction plan later this week at Facebook Inc.’s headquarters in Palo Alto, California, and in Reno, Nevada.

Democrats say New York-based S&P’s revision in the U.S.’s long-term credit outlook helps make the case for a broad agreement based on the debt-cutting plan Obama outlined last week. Republicans say the ratings firm’s report reinforces their call for deeper spending cuts than the president and other Democrats have been willing to consider.

S&P said the government risks losing its AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt. The company maintained its top rating on U.S. long-term debt while lowering the outlook to “negative” for the first time.

Negative Outlook

The White House downplayed the negative outlook, saying it was based on a faulty appraisal of the political climate.

Austan Goolsbee, chairman of Obama’s Council of Economic Advisers, said yesterday that the outlook was based on a “political judgment” of prospects for a deficit-reduction agreement that doesn’t deserve “too much weight.”

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 relies 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 revision “a wake-up call for those in Washington asking Congress to blindly increase the debt limit” 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 fiscal 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 raising the government’s $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.

Reliability Questioned

S&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.

Some of Obama’s Democratic allies questioned S&P’s reliability, citing the top rating it gave to mortgage-backed securities that later crashed in value and contributed to the 2008 financial crisis.

“Given that the Financial Crisis Inquiry Commission called the credit rating companies ‘key enablers of the financial meltdown,’ it’s difficult to know how much credibility S&P should be given,” said Paul Begala, a Democratic strategist who helped to run Bill Clinton’s first presidential campaign in 1992 and served in the Clinton White House as a political adviser.

Members of the so-called Gang of Six, a group of six Democratic and Republican senators who are seeking to negotiate a compromise deficit-reduction plan, said the S&P move shows the markets are watching for signs that policy makers will confront the debt.

“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,” Senator Mark Warner of Virginia, the Democratic leader of the group, said in a statement.

‘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.”

The White House said yesterday that Vice President Joe Biden will open a round of negotiations with members of Congress on long-term deficit reduction with a meeting at Blair House on May 5.

The Obama administration has been bracing for the change in outlook for about two months as S&P reviewed its assessment of U.S. debt. During the period, David Beers, the head of the company’s public finance unit, was in touch with Mary Miller, the assistant Treasury secretary for financial markets, according to a person familiar with the discussions.

Deficit Plan

About 10 days ago, Treasury Department officials gained a stronger sense that S&P would issue a negative outlook, the person said. That was shortly before the April 13 speech in which Obama presented his deficit plan.

While Treasury officials sought to persuade the company that Congress and the administration were determined to reduce the deficit, S&P told the Treasury Department of its final outlook on the afternoon of April 15 and of its plan to make an announcement yesterday.

White House and Treasury officials prepared their response over the weekend, seeking to convey a message of optimism without appearing to be in denial about the challenges of reaching an agreement on long-term deficits, said the person familiar with the discussions.

Less than half an hour after the S&P announcement, Miller released a statement saying the outlook “underestimates the ability of America’s leaders to come together.”

First Since 1996

The announcement was the first time the U.S. credit outlook has been questioned since 1995 and 1996, when a dispute between Clinton and House Speaker Newt Gingrich, a Georgia Republican, led to two government shutdowns. Fitch Ratings put U.S. debt on a “negative ratings watch” in November 1995 until spring 1996, and Moody’s Investors Service put some U.S. government bonds on review for a possible downgrade in January 1996.

The S&P 500 Index rose 0.1 percent to 1,306.46 at 12:29 p.m., after falling 1.1 percent yesterday. The Dow Jones Industrial Average rose 0.2 percent to 12,222.29, after a 1.1 percent decline yesterday.

The yield on the benchmark 10-year Treasury note jumped as high as 3.45 percent yesterday in the minutes after the S&P report, then fell back to 3.37 percent as investors focused on speculation that Greece will be unable to avoid a default, driving them to the relative safety of U.S. debt.

In trading today, 10-year yields fell 2 basis points, or 0.02 percentage point, to 3.35 percent at 12:35 p.m. in New York, according to Bloomberg Bond Trader prices.

A gauge of the dollar yesterday advanced the most since November against the currencies of major trading partners on increased demand for a refuge as Europe’s debt crisis outweighed the negative S&P U.S. credit-rating outlook.

IntercontinentalExchange’s Dollar Index increased 0.9 percent to 75.508 at 5 p.m. in New York yesterday, from 74.832 on April 15. The gauge tracks the dollar against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona. The index fell 0.5 percent today to 75.115.

The euro rose 0.6 percent to $1.4319 as of 12:38 p.m. Yesterday, the dollar appreciated 1.4 percent to $1.4235 per euro in New York from $1.4430 on April 15.

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