Obama Vows No Negotiations on Debt as Deficit Talks Loom

President Barack Obama vowed he won't negotiate over raising the government's debt ceiling even as he offered to deal on a separate track with the deficit reduction demanded by Republicans. Warning of economic calamity, Obama accuses Republicans of holding the nation hostage as he attempts to push Congress towards action.

By Margaret Talev & Julianna Goldman
Jan 15, 2013 6:54 AM MT
Bloomberg

President Barack Obama vowed he won’t negotiate over raising the government’s debt ceiling even as he offered to deal on a separate track with the deficit reduction demanded by Republicans.

Warning of economic calamity and stalled payments to Social Security recipients, military personnel and government creditors if the $16.4 trillion debt limit isn’t lifted, Obama accused Republicans of holding the nation hostage as he sought to push Congress toward action to avoid.

“What I will not do is to have that negotiation with a gun at the head of the American people,” Obama said at a White House news conference yesterday, referring to the Republican linkage of increasing the debt limit with deficit reduction.

“They will not collect a ransom in exchange for not crashing the American economy,” he said.

Obama and congressional Republicans appear headed toward a confrontation over the debt limit, deficit reduction and keeping the government running that will come to a head over the next six to eight weeks.

The Treasury reached its statutory borrowing limit on Dec. 31 and is using “extraordinary” measures to pay for the government. Those measures will work only until mid-February to early March, Treasury Secretary Timothy F. Geithner said in a letter yesterday to congressional leaders.

By the end of February, lawmakers and the White House also will have to come up with a plan to avert automatic spending cuts, which both sides deferred in the year-end budget deal.

Second Deadline

Congress faces an additional deadline at the end of March to pass legislation to keep the government running at current funding levels in absence of an annual budget.

Senate Republican leader Mitch McConnell of Kentucky said the debt ceiling debate is the “perfect time” to address spending, while House Speaker John Boehner, an Ohio Republican, brushed off Obama’s insistence on keeping the two separate.

Voters “do not support raising the debt ceiling without reducing government spending at the same time,” Boehner said in a statement. He said he plans to discuss his debt-ceiling strategy with his leadership team when the House of Representatives returns to Washington this week.

Raise, Lower

Obama maintains that raising the debt limit to pay for expenses already authorized by Congress is non-negotiable.

The debt limit has been periodically raised since its creation in 1917, when Congress and President Woodrow Wilson approved a measure enabling the Treasury to issue long-term securities to help finance entry into World War I. Congress increased it to reflect the cost of World War II, and lowered the level after the war ended. Since 1960, Congress has raised or revised the ceiling 79 times, including 49 times under Republican presidents, according to the Treasury Department.

While Obama expressed his willingness to negotiate on deficit-reduction measures, he called threats to let the government default on bills already accrued by failing to raise the debt limit “irresponsible” and “absurd.”

“Markets could go haywire,” he said. “It would slow our growth, might tip us into a recession and, ironically, would probably increase our deficit.”

When partisan gridlock brought the government to the brink of default in August 2011, the stock market fell and Standard & Poor’s (SPY) cut the nation’s credit rating.

Still, U.S. Treasury bond investors -- who most directly bear the risk of a government default -- haven’t shown alarm over political fights that continually are resolved.

Treasury Yields

Yields on 10-year U.S. Treasury notes declined from 2.96 percent on July 22 to 2.56 percent on Aug. 5, 2011, the day of the S&P downgrade. Yields continued to fall, reaching 1.72 percent on Sept. 22 of that year.

As another debate over the debt limit resumes in Washington, the 10-year yield was down two basis points, or 0.02 percentage point, to 1.82 percent at 8:26 a.m. today in New York, according to Bloomberg Bond Trader prices.

The Standard & Poor’s 500 Index (SPX) is up 3.1 percent this year after rising 13.4 percent last year. The prospect of slower Apple Inc. (AAPL) iPhone sales was a bigger driver than Washington’s fiscal debate yesterday as the S&P 500 lost less than 0.1 percent to 1,470.68 at 4 p.m. in New York.

As part of a White House strategy to explain the debt- ceiling debate to the public as a matter of covering costs already incurred, Obama compared it to eating out at a restaurant and then not paying the check.

“Now, if Congress wants to have a debate about maybe we shouldn’t go out to dinner next time, maybe we should go to a more modest restaurant, that’s fine,” Obama said. He referred 26 times to the U.S. “paying its bills.”

Conference Call

Geithner, National Economic Council Director Gene Sperling and senior Obama adviser Valerie Jarrett held a conference call yesterday with more than three dozen business leaders to discuss the president’s deficit-reduction plans, according to a White House official. Participants included Goldman Sachs Group Inc. (GS) Chief Executive Officer Lloyd Blankfein, AT&T Inc. (T) CEO Randall Stephenson and Xerox Corp. (XRX) CEO Ursula Burns, said the official, who asked not to be named in describing the call.

Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York, said Obama is “putting the warning out there to get Congress to move on this, but we doubt there will be an agreement before the last minute,” as was the case with the budget deal reached Jan. 1.

“It’s not an exaggeration to say the markets might go haywire,” Rupkey said. “But the markets went through delay and downgrade before in August 2011. Knowing what to expect means the market may have discounted a bad outcome. You can fool the market once but rarely twice. I get the feeling even a default would be viewed as technical.”

‘Severe’ Turmoil

Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said that for now, investors anticipate an agreement if only because “the financial and economic turmoil would be so severe it is hard to see how Washington would quickly fail to come to terms on the debt ceiling.”

Tony Fratto, a former White House and Treasury spokesman during President George W. Bush’s administration, said Obama is starting from a position of relative strength.

“I believe him when he says he’s not going to negotiate straight-up on the debt ceiling, and if I were in the White House I’d be advising the same thing,” Fratto said.

Fratto said Republicans’ response may be to tie the debt ceiling to the showdown over funding the government or present Obama with “an offer he can’t refuse,” such as some of the spending cuts he’s entertained, such as the changing the way inflation is calculated for Social Security benefits.

“Congress has no choice but to raise the debt ceiling,” Fratto said. “It’s an uncomfortable place for Republicans to be, but that’s the way it is.”

To contact the reporters on this story: Margaret Talev in Washington at mtalev@bloomberg.net; Julianna Goldman in Washington at jgoldman6@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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