A bill that would raise the U.S. debt limit by $2.4 trillion failed to win House passage yesterday in a vote Democrats said was rigged to ensure its defeat.
Last week, Republicans who control the House of Representatives announced the vote as a way to demonstrate that lawmakers don’t support extending the $14.3 trillion debt limit unless agreement is reached with President Barack Obama’s administration on significant spending cuts.
The vote on the debt-limit increase was 97 in favor, all Democrats, and 318 opposed -- 236 Republicans and 82 Democrats. Support for the increase not only failed to win a majority; it fell 180 votes short of the 277 votes, or two-thirds of those voting, that were needed for passage under the streamlined procedures Republicans used to bring the measure to the floor.
House Republicans met today with Obama at the White House as they look for an agreement on a package of spending cuts in negotiations led by Vice President Joe Biden in time to raise the debt ceiling by an Aug. 2 deadline. Biden has said negotiators are trying to find savings of $1 trillion over 10 years.
Yesterday’s vote won’t fan worries among bond traders that the U.S. may default on its obligations because “the markets are used to considerable amount of theater before any major debt-ceiling debate,” said Lou Crandall, chief economist for the Wrightson ICAP LLC unit of London-based ICAP Plc, the world’s largest broker of trades between banks.
Eye on Deadline
“People generally assume” that “these sorts of issues won’t come to a head just before the projected deadline,” he said in a telephone interview. “That’s still a couple of months off,” so “no one is anticipating an action at this point.”
Still, the cost of insuring U.S. government debt against losses for one year with credit default swaps is rising while the price of protection over longer periods has fallen, as investors bet the standoff over raising the debt ceiling may drag into August.
Credit default swaps that expire in one year rose to 47.425 basis points as of yesterday from 23.74 basis points on May 16, when the U.S. reached its borrowing limit. A 33 percent jump on May 20 was the biggest one-day percentage increase since July 2008, according to data compiled by Bloomberg. A basis point equals $1,000 annually on a swap protecting $10 million of debt.
Reflecting long-term investor confidence in U.S. debt, swaps protecting against default for 10 years has fallen to 55.48 basis points from 61.17 basis points over the same period, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Credit default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. Rising prices indicate declining investor confidence in a borrower’s creditworthiness.
For all of Washington’s debate about the deficit, bond market yields in the U.S. are lower now than they were when the government was running a budget surplus a decade ago. The yield on the benchmark 10-year Treasury note fell below 3 percent for the first time in 2011, dropping nine basis points, or 0.09 percentage point, to 2.97 percent at 10:45 a.m. in New York, according to Bloomberg Bond Trader prices.
White House press secretary Jay Carney yesterday said the administration believes that Congress ultimately will act to raise the debt ceiling.
Must Be Raised
“Regardless of any other development the debt ceiling must be and will be raised,” he said. He declined to characterize yesterday’s House vote, other than to say it’s “an expression of a point of view” regarding the need to address deficits.
“We share the concerns that drive those views,” he said. “In the end, the debt ceiling has to be raised.”
In a statement after the vote, House Speaker John Boehner, a Ohio Republican, said that a debt-limit increase “without major spending cuts and meaningful reforms would hurt our economy and destroy more jobs, adding to our debt crisis. Today the House stood with the American people and said very clearly that this course of action is unacceptable.”
Boehner and House Republicans met this morning at the White House with Obama in what the House speaker called a “very productive” session about spending cuts and the debt ceiling.
House Democratic Whip Steny Hoyer of Maryland said it was irresponsible for Republicans to conduct the vote “solely for the purpose” of defeating the measure. “To put something on the floor for the purpose of seeing it fail, without any opportunity to debate” shows that “this is a political charade,” he told reporters.
In a May 24 statement issued to introduce the measure, House Ways and Means Chairman Dave Camp said he would oppose raising the debt ceiling without “significant spending cuts and budgetary reforms.”
‘Serious’ About Solutions
As proposed by Camp, a Michigan Republican, the legislation would have raised the debt limit by $2.4 trillion, the amount Obama’s proposed budget said would be needed to continue U.S. borrowing through the 2012 fiscal year.
The measure “will allow the House to reject a clean increase in the debt limit, proving to American people, the financial markets and the administration that we are serious about tackling our debt and deficit problems,” Camp said in his statement.
“It is so important that we have a clear path forward” to spending cuts “given what the ratings agencies are saying about our debt,” Camp said yesterday in floor debate.
Standard & Poor’s in April put the U.S. debt on a “negative outlook” on concern that Congress and Obama wouldn’t agree on a plan to curb medium- and long-term spending.
“It would be irresponsible to increase the debt ceiling without reforms that start cutting spending,” Louisiana Republican Steve Scalise said in yesterday’s debate.
“Enough of giving the president the uncontrolled use of the American credit card,” he said.
House Minority Leader Nancy Pelosi, a California Democrat, said Republicans were propagating a “false premise” that raising the debt limit would encourage more borrowing.
She and other Democrats also pressed the case that much of the government’s debt was accrued during Republican President George W. Bush’s administration.
Hoyer said “we need to deal with this issue seriously,” and not “as a simplistic suggestion that somehow President Obama caused this.” As examples of expenses that began under Bush, he cited $1.3 trillion spent on wars in Iraq and Afghanistan, an expanded Medicare “drug prescription bill we haven’t paid for,” and “tax cuts your party voted for” that “we didn’t pay for.”
With 87 freshmen Republican lawmakers, many elected with support of the Tea Party movement, Boehner has sought to reassure his members that he will insist in negotiations that such spending cuts are imposed as a condition of raising the debt ceiling.
Boehner has also sought to reassure bond investors that the U.S. won’t default on its financial obligations. Treasury Secretary Timothy Geithner has warned that a failure to raise the debt ceiling by Aug. 2, the date he now projects borrowing authority would be exhausted, may have catastrophic effects on the U.S. economy by sharply raising borrowing costs.
Boehner has said that spending cuts should exceed the amount by which Congress increases the borrowing authority. Today he released a statement signed by more than 150 economists, who called on Congress to include in any debt-limit legislation “spending cuts and reforms that are greater than the accompanying increase in debt authority being granted to the president.”
Failing to do so “would harm private-sector job growth and represent a tremendous setback in the effort to deal with the national debt,” said the economists, who include Nobel economics laureate Robert Mundell of Columbia University and two former directors of the Congressional Budget Office -- Douglas Holtz-Eakin, who served under Bush, and June O’Neill, who served under President Bill Clinton, a Democrat.