S&P Action Clouds Obama Re-Election Bid

08 Aug 2011

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US President, Barrack Obama

The U.S. Treasury Department said there is “no justifiable rationale” for Standard & Poor’s move to downgrade the nation’s credit rating as global finance ministry officials prepared responses to the historic announcement.

Standard & Poor’s officials stood by their decision announced Aug. 5 and laid blame on a political system that failed to adequately address deficit reduction in the compromise law that President Barack Obama signed Aug. 2 to avert a U.S. default on its debt.

Bloomberg report said that the Treasury Department issued a statement saying S&P had acknowledged an “error” in its calculations and that the rating company made a $2 trillion mistake.

Investors seeking a haven amid concerns the global economic rebound is fading have bought Treasuries in recent weeks, even after S&P warned it may lower the U.S. rating. Yields on benchmark 10-year notes closed at 2.56 percent Aug. 5, before S&P announced its decision, down from 3.12 percent a month ago.

Reassuring Investors

The Obama administration worked Saturday to reassure investors around the world that Treasury securities remain a safe place to invest and sought to limit any negative effects on the economy, in part by criticizing S&P, according to an administration official who spoke on the condition of anonymity.

Meanwhile, some lawmakers said yesterday the S&P downgrade announcement may put pressure on Congress to come up with more significant deficit reduction in the coming months. Senator Tom Coburn, an Oklahoma Republican and a member of the so-called Gang of Six that has been working since early this year on a bipartisan deficit-reduction plan, said the S&P downgrade was “probably long overdue.”

“For decades, political careerism has trumped statesmanship in Washington,” Coburn said in a statement Saaturday. “Both parties have done what is safe, not what is right. The dysfunction in Washington is the belief that we can live beyond our means forever. We can’t.”

Partisan Gamesmanship

Senate Majority Whip Richard Durbin, an Illinois Democrat, said the downgrade underscores the need for a “comprehensive solution to the problem” that includes more federal revenue.

The downgrade “is also a political one,” he said in an e- mail Saturday. “Partisan gamesmanship has left global markets, rating agencies and the American people searching for stability.”

Former Senator Alan Simpson, a Wyoming Republican who served as co-chairman of President Barack Obama’s fiscal commission, said he hopes the S&P downgrade will cause lawmakers to take deficit deliberations more seriously.

“It ought to push them more toward reality and the reality is if you spend a buck and borrow 41 cents, you have to be very stupid,” Simpson said in a phone interview yesterday.

Obama was spending the weekend at the Camp David presidential retreat in the Maryland mountains. There were no plans for him to make a statement reacting to the S&P downgrade, according to an administration official, who wasn’t authorized to speak publicly.

Methodology Objection

The president will urge Congress in coming weeks to set aside “our political and ideological differences” and work for deficit reduction and economic recovery, White House Press Secretary Jay Carney said in an e-mailed statement Saturday The four-paragraph statement didn’t mention the S&P downgrade.

A person familiar with the discussions between the Treasury Department and S&P said Treasury officials objected to the methodology the agency used in issuing the downgrade. The person said the differing verdicts from the agencies may limit the effects of the S&P move. Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings Aug. 2, the day Obama signed the bill that ended the debt-ceiling impasse.

The deal includes $917 billion in spending cuts over the next decade and calls for a joint committee, comprised of six Republican lawmakers and six Democrats, to find as much as $1.5 trillion more by Nov. 23. If the panel is unable to agree on a plan or if its recommendations are rejected by Congress before year’s end, there would be automatic $1.2 trillion in across- the-board reductions starting in January 2013.

Asian Retention

Asian investors are likely to retain their Treasury holdings for now, with alternatives limited by the region’s foreign- exchange rate policies.

Japan, the second-largest international investor in U.S. government debt, sees no problem with trust in the securities, a Japanese government official said on the condition of anonymity.

New York-based S&P lowered the AAA credit rating for the U.S. by one level, to AA+, in response to the deal Obama and lawmakers reached to raise the $14.3 trillion debt limit.

The company’s statement on the downgrade said it’s “pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics anytime soon.”

‘Wake-Up Call’

Donald Marron, director of the Tax Policy Center, a nonpartisan research group in Washington, said the downgrade is “another wake-up call” for Obama and lawmakers to address deficit issues, though he said “it’s not obvious to me that we have compromise bursting out all over the next six months.”

Alice Rivlin, former President Bill Clinton’s budget director who served on a fiscal commission Obama set up last year, said “the downgrade provides no new information.”

“One possible positive” of S&P’s move could be that it prods the committee “into coming up with a big deficit- reduction package -- bigger than the $1.2 trillion called for in the ‘trigger’,” said Ajay Rajadhyaksha, head of U.S. fixed- income strategy at Barclays Capital in New York.

S&P noted in its report that the failure to act on increasing government revenue also was a consideration in its decision. The rating company said it no longer assumes that the 2001 and 2003 tax cuts enacted under President George W. Bush would expire by the end of 2012 “because the majority of Republicans in Congress continue to resist any measure that would raise revenues.”

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