Bloomberg News

Moody’s Warning a Call to Action on U.S. Debt, Lawmakers Say

June 03, 2011

June 3 (Bloomberg) -- Congressional leaders from both parties said a warning by Moody’s Investors Service that it may put the U.S. government debt rating on review for a downgrade is an alert to reduce the deficit and raise the debt ceiling.

Each side said it has no intention of letting the government default on its obligations. Still, neither Democrats nor Republicans budged from their public positions in the dispute over the government’s finances, complicating the path to a deal.

House Democrats emerged from a meeting with President Barack Obama at the White House yesterday insisting that tax increases be part of a deficit-cutting package, a proposal Republicans reject. The Democrats also continued to resist Republican proposals for cuts in the Medicare and Medicaid government health programs as part of a budget-cutting accord to accompany a debt-limit increase.

The urgency to reach agreement increased yesterday after Moody’s said it may put the U.S. government debt rating on review for a downgrade if no progress is made on raising the debt limit by mid-July.

“We’re going to get this done,” Representative Steny Hoyer of Maryland, the House’s second-ranking Democrat, told reporters after the meeting with Obama. “The markets ought to know we’re going to get this done.”

Democrats want to bring down the deficit and debt while “making sure Medicare is strengthened and preserved for seniors,” said Hoyer.

‘Balanced’ Approach

Representative Chris Van Hollen of Maryland, the top Democrat on the Budget Committee, said there must be a “balanced” solution. He rejected what he called Republicans’ “lopsided approach.”

Treasury Secretary Tim Geithner met with freshman House members yesterday at the Capitol and told reporters afterward, “I’m confident two things are going to happen this summer. One is we’re going to avoid a default crisis, and we’re going to reach agreement on a long-term fiscal plan.”

In its statement, New York-based Moody’s said: “The heightened polarization over the debt limit has increased the odds of a short-lived default.”

“If this situation remains unchanged in coming weeks, Moody’s will place the rating under review.”

Moody’s statement “underscores the need for Congress to move quickly to ensure that the U.S. can meet all of its obligations, while continuing to work on a consensus approach towards long-term fiscal balance,” said Mary Miller, Treasury assistant secretary for financial markets.

Standard & Poor’s

In April, Standard & Poor’s put the U.S. government on notice that it risks losing its top AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt.

Republicans, after a White House meeting with Obama on June 1, defended their plans for Medicare and Medicaid, and said higher taxes must be off the table in any agreement.

The Moody’s warning “makes clear that if we let this opportunity pass without real deficit reduction, America’s financial standing will be at risk,” House Speaker John Boehner, an Ohio Republican, said in a statement yesterday. “A credible agreement means the spending cuts must exceed the debt limit increase. The White House needs to get serious right now about dealing with our deficit and debt.”

Boehner, intensifying pressure for a quick and far-reaching deal to slash U.S. government spending, said June 1 “it’s time” that he and Obama get personally involved in talks on a broad debt-reduction package.

Biden Talks

Boehner voiced concern that bipartisan negotiations led by Vice President Joe Biden are proceeding too slowly, and said the White House and Congress should strike a deal within a month to end an impasse over raising the nation’s $14.3 trillion debt ceiling that could spook investors and lead to an unprecedented government default.

Geithner is already using what he calls “extraordinary measures” to avoid exhausting the nation’s borrowing authority, and he has said that he will run out of options for avoiding default by Aug. 2. Boehner said he was worried that the Biden- led discussions would go down to the wire, putting Congress up against that date.

White House press secretary Jay Carney yesterday shrugged off Boehner’s suggestion. “The vehicle for the negotiations are the talks with the vice president,” Carney told reporters, adding that negotiations between Biden and lawmakers “have made progress.”

‘Rattle the Markets’

Carney also said that pushing the negotiations to the end of July “could rattle the markets.”

Biden’s negotiations over increasing the debt ceiling as part of a spending-cut plan began May 5. There have been four meetings between the vice president and six congressional leaders, with the next one set for June 9. Biden has said that progress is being made and that negotiators are trying to find savings of $1 trillion over 10 years.

Yields on 10-year Treasuries climbed to 3.03 percent at 5 p.m. in New York yesterday, from 3.01 percent before the Moody’s announcement and a six-month low of 2.94 percent June 1. The Standard & Poor’s 500 Index, which tumbled 2.3 percent June 1 amid concern the economic recovery is faltering, fell 0.1 percent to 1,312.94 after opening the session at its cheapest valuation since March.

--With assistance from Kathleen Hunter, Kate Andersen Brower, Julie Hirschfeld Davis, Roger Runningen, James Rowley in Washington. Editors: Laurie Asseo, Don Frederick

To contact the reporters on this story: Catherine Dodge in Washington at cdodge1@bloomberg.net; Julianna Goldman in Washington at jgoldman6@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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