The corporations would ideally like the Democrats and Republicans to simultaneously reach a deal on spending cuts to social programs and a lower corporate tax rate based on the recommendations of the Simpson-Bowles commission, but their immediate concern is to prevent a "technical default" (temporary delay on interest payments) to bondholders on the 17th which would roil global financial markets, possibly spike interest rates, and damage the dollar's standing as the world's most important reserve currency. The Tea Party Republicans have indicated they are ready to honour the payments to bondholders, but want other funding tied to rollbacks to Obamacare and prompt approval of the Keystone XL pipeline. The administration, backed by the US business and political establishment, is adamantly opposed to anything which suggests to international creditors that the "full faith and credit of the US government" is up for negotiation.
The Republicans made a similar threat to freeze the debt ceiling in 2011 but quickly buckled after Big Business threw its weight behind the administration. Investors and the media are again discounting the possibility of a default this time round, but uncertainty is increasing as the deadline looms.
Business Leaders Behind Scenes as Fiscal Fight Unfolds By Julianna Goldman Bloomberg News Sept 26, 2013
U.S. business leaders have a message for President Barack Obama and the political leaders in Congress over the stalemate on the budget and debt ceiling: It’s not our job to save Washington from itself.
Unlike previous fiscal showdowns, including the last-minute budget deal at the start of this year and the standoff over the debt limit in 2011, business representatives aren’t rushing in to publicly lobby for an agreement.
With four days to go before federal spending authority runs out and a few weeks until the U.S. hits its borrowing limit, executives who’ve engaged in past Washington fiscal battles say while they’d prefer that the government not shut down, their top concern is avoiding a federal default.
“If we default, it’s economic suicide,” said David Cote, chief executive officer of Honeywell International Inc. (HON) and a member of the Campaign to Fix the Debt. “You don’t want the Congress or the president looking at it and ever saying ‘I have the upper hand here because the other side has to blink.’ This is one where both sides have to blink.”
This version of the budget-and-debt debate has become tangled with unrelated issues including the president’s health-care law andTransCanada Corp. (TRP)’s Keystone XL pipeline. Executives say they see little chance that Obama or Republican leaders can get an agreement on what should be the main issues of taxes and entitlement spending, and without that part of the equation, many executives are staying behind scenes.
Main Issues
Cote said he’s made the point during conversations with Republican and Democratic congressional leaders as well as Obama and other administration officials that they should use this opportunity to deal with those issues.
“We still have not addressed the big things here, which are entitlement and tax reform,” said Cote, who was a member of Obama’s 2010 fiscal commission. “It’s a great time to say let’s talk about all these other things.”
Cote was among a group of CEOs Obama met with from the Business Roundtable last week in Washington. The president urged them to get engaged and encourage lawmakers to avoid a government shutdown and raise the debt ceiling with minimal disruption.
Treasury Secretary Jacob J. Lew held a conference call on the debt limit yesterday with about three dozen business leaders including Bank of America Corp. (BAC) Chief Executive Officer Brian Moynihan, Blackstone Group (BX) LP CEO Stephen Schwarzman and Goldman Sachs Group Inc. President Gary Cohn.
Debt Limit
The topic was a letter Lew sent to House Speaker John Boehner saying that the extraordinary measures being used to avoid breaching the $16.7 trillion statutory debt ceiling will be exhausted no later than Oct. 17.
Lew also was at a meeting in New York Sept. 24 hosted by Morgan Stanley (MS) Vice Chairman Tom Nides with more than a dozen financial executives including Blackstone Group President Tony James, Evercore Partners Inc. (EVR) CEO Ralph Schlosstein and Dan Loeb, CEO of Third Point LLC. Also among the attendees at yesterday’s meeting was Josh Steiner, head of Industry Verticals at Bloomberg LP, the parent company of Bloomberg News.
Most of the discussion was focused on the debt ceiling. Lew told the group that while the administration has been willing to compromise to get a larger budget deal, they won’t negotiate when the full faith and credit of the U.S. is at stake, according to participants.
Seeking Information
“Information is very important at a time like this,” Nides said. “People need to understand this is not something that the administration is taking lightly.”
James said the fact that markets have remained calm amid the political wrangling poses a danger.
“That gives politicians of some stripe leeway to push it to the limit, and if you push it to the limit, there’s a high likelihood or probability or possibility, maybe, of miscalculation,” James said in a Bloomberg Television interview.
Treasury 10-year notes rose yesterday, pushing yields to the lowest level in six weeks, on speculation that budget talks may fail to avert a government shutdown. The benchmark U.S. 10-year yield dropped three basis points, or 0.03 percentage point, to 2.63 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices.
U.S. stocks have slumped during the past week, with the benchmark Standard & Poor’s 500 Index (SPX) retreating 1.9 percent in the past five sessions. For the year, the S&P 500 is still up 18.7 percent.
Fiscal Deadlines
The deadlines are nearing. The government’s fiscal year ends Sept. 30 and Congress and the White House still haven’t agreed on funding federal operations beyond that. Republicans are trying to tie budget legislation to stripping funding for the health-care law known as Obamacare, while the president and Democrats insist they won’t let that happen.
Senate Majority Leader Harry Reid, a Nevada Democrat, worked yesterday to speed debate on a measure that would continue to fund the health-care law. If Democrats win on the spending legislation, congressional Republicans are threatening to bring the health law and other budget demands into separate legislation on raising the debt limit.
After the 2011 showdown, the U.S. credit rating was downgraded, consumer confidence dropped to its lowest point since the financial crisis in 2008 and the stock market plummeted. The S&P 500 fell 16.8 percent between July 22, 2011, when talks on a broad deal faltered, and Aug. 8, the first trading day after the government’s AAA debt was downgraded. Every stock in the S&P 500 fell on Aug. 8.
Bond Market
By contrast, the bond market wasn’t fazed. Yields on 10-year Treasury notes declined to 2.61 percent on Aug. 2 of that year, from 3.18 percent on July 1, 2011, and continued to fall to 1.88 percent at year-end.
Administration officials said pressure from the business community was effective in the past and would be helpful now.
“We believe they are a powerful voice on how the kind of brinkmanship we saw in 2011 can impact the private sector’s ability to create jobs and grow the economy,” said Amy Brundage, a White House spokeswoman. “And we hope that the minority of Republicans in Congress who continue to insist on playing chicken with the full faith and credit of the United States government listen.”
The administration’s outreach efforts so far have led to mostly written statements with little effect on the debate.
The Chamber of Commerce urged House members in a letter last week not to risk a government shutdown and to raise the debt limit in a “timely manner.” The Business Roundtable’s third-quarter 2013 CEO Economic Outlook Survey showed that 50 percent of the leaders asked, said the budget and debt disagreements in Congress were having a negative impact on plans for hiring over the next six months.
Cote said that while the business organizations have been pretty vocal, they don’t want to get drawn into all the “political machinations” every step of the way.
“I’m going to count on our leaders being smart enough not to default,” he said.
To contact the reporter on this story: Julianna Goldman in Washington at jgoldman6 at bloomberg.net
To contact the editor responsible for this story: Steven Komarow at skomarow1 at bloomberg.net
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