Debt Deal Seen Saving U.S. Companies $60 Billion: BGOV Barometer

Graphic: Dave Merrill/Bloomberg
Graphic: Dave Merrill/Bloomberg A $4 trillion federal deficit-reduction deal would save U.S. corporations roughly $60 billion in annual interest payments by 2022.

A deficit-reduction package on the scale contemplated by President Barack Obama and Republicans in Congress would deliver long-term benefits to U.S. corporations and their shareholders as well as to taxpayers, according to Bloomberg Government analysts.

The BGOV Barometer shows that a $4 trillion combination of spending cuts and tax increases over 10 years would result in annual savings of $60 billion in corporate borrowing costs. A package as large as $9 trillion would produce annual interest savings of as much as $168 billion, Bloomberg Government projects in a study published yesterday.

A lower cost of capital would lift the stock-market value of public companies in the U.S. by $1.1 trillion to $2.3 trillion in 10 years, depending on the size of the package. Closely held businesses also would benefit from lower capital costs, the Bloomberg Government analytic team led by Director of Research Robert Litan concludes in the study.

“These capital-cost and equity-value benefits of a potential budget deal deserve more attention from firms, the investment community and most importantly the budget negotiators than they have so far received,” Litan said.

Interest rates are near historic lows after five years of monetary-policy easing by the Federal Reserve to counter the deepest economic slump since the Great Depression. While borrowing costs will head higher as the economy recovers, a credible deficit reduction plan “would restrain the eventual increase in rates,” the analysts say in the study.


The analysts calculated reductions in corporate borrowing costs using a formula developed by William Gale, director of economic studies at the Brookings Institution, and Peter Orszag, former director of the White House Office of Management and Budget. Gale and Orszag’s work showed that an increase in the budget deficit equivalent to 1 percent of gross domestic product raises interest rates on 10-year Treasuries by 0.25 to 0.35 percentage point.

The Bloomberg Government analysis found that a $4 trillion debt-reduction deal would hold back an anticipated rise in interest rates by about half a percentage point by 2022, triggering the $60 billion savings in company borrowing bills.

Traders currently anticipate 10-year Treasury rates will rise to 2.94 percent in 2022, from 1.59 percent currently, according to interest-rate swap data compiled by Bloomberg.

While a $4 trillion agreement is the arrangement “most likely to be put in place,” it’s not enough to put the government on sound fiscal footing, Bloomberg Government analysts found. They said it would take a 10-year package of $5.9 trillion in deficit reduction to stabilize the debt-to-GDP ratio at current levels. A $9 trillion deal with revenue increases and cost reductions would be necessary “to ensure the country’s long-run fiscal soundness,” the analysts found.

Automatic Cuts

Obama and Republicans in Congress are seeking a comprehensive deficit-reduction package to let them avoid the $600 billion in tax increases and automatic spending cuts, commonly referred to as the fiscal cliff, set to begin in January.

Republicans have rejected Obama’s proposal to raise $1.6 trillion in taxes, including raising rates on the top 2 percent of earners. House Republicans offered a $2.2 trillion plan that would trim Medicare and Social Security costs and cap tax deductions for the top income brackets. Obama said Dec. 4 that limiting deductions is not enough and he will make no deal that doesn’t include higher rates on the wealthiest taxpayers.

Not all companies would benefit equally from a budget deal, the Bloomberg study found. For example, “some companies would not trade spending cuts to their government contracting business for a reduced interest on their debt.”

Any stock-market benefit will take time and will depend on whether investors view a deficit-reduction agreement as credible, the study said.

“It is conceivable that the stock market reaction estimated here could manifest itself even before a deal is signed -- just as soon as it is clear that it will be signed,” the analysts said in the study. “At the same time, because of the multi-year nature of any deal, investors may take a ‘wait and see’ approach and only gradually push stock prices up.”

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