Downgrade May Cloud Obama Re-election Bid

Saturday, 06 Aug 2011 08:06 AM

 

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The downgrade of the U.S.’s AAA credit rating by Standard & Poor’s darkens President Barack Obama’s re-election chances while also damaging members of Congress from both parties as they prepare for the 2012 campaign, political analysts said.

With Obama’s job-approval rating at 48 percent and an all- time high of 82 percent of Americans giving Congress negative marks in a New York Times/CBS News Poll taken this week, the downgrade will hurt the president and lawmakers by fueling economic uncertainty, possibly raising interest rates and wounding national pride, analysts said.

“Americans expect to be No. 1 at everything,” said Republican strategist Ron Bonjean. A downgrade is “a great insult and humiliating to the country.”

Added Bonjean, “If this brings rising interest rates on credit cards and mortgages, it is going to send a political shockwave throughout the system, and there will definitely be a ‘throw-the-bums-out’ mentality.”

S&P’s move deals a blow to Obama’s political standing by giving Republican presidential candidates the chance to attack him for being the first U.S. president to preside over a downgrade, said Ross Baker, a political scientist at Rutgers University in New Brunswick, New Jersey.
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“Most people understand the inability to satisfy the bond-ratings agencies was not Obama’s alone” and that Congress gets “much more than half of the blame for this,” Baker said. Still, he said, “Blame generally falls on the president when something like this happens.”
‘Deeply Troubling Indicator’

Republican presidential candidates who were quick to jump on Obama following the downgrade included former Massachusetts Governor Mitt Romney, the frontrunner in most polls, and U.S. Representative Michele Bachmann of Minnesota, who voted against the deficit-reduction deal enacted this week that prompted the S&P downgrade.

“America’s creditworthiness just became the latest casualty” in Obama’s “failed record of leadership on the economy,” Romney said in a statement. The downgrade is “a deeply troubling indicator of our country’s decline under” the president, he said.

Bachmann said S&P’s action “is a historically significant and serious event for the United States.” Obama “has destroyed the credit rating of the United States through his failed economic policies and his inability to control government spending by raising the debt ceiling,” she said in a statement.
Deal ‘Falls Short’

Obama, who left for the Camp David presidential retreat in Maryland hours before the downgrade was made public, didn’t immediately issue a response.

New York-based S&P lowered the AAA credit rating for the U.S. by one level, to AA+, in response to the deal that Obama and lawmakers reached that increased the government’s $14.3 trillion debt limit to avoid a default. While Republicans, who control the U.S. House of Representatives, insisted that a deficit-reduction plan accompany the debt-limit increase, the accord reached in Washington was dismissed by S&P in its statement on the downgrade.

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” the credit-rating service said.

The company also 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.”
Moody’s, Fitch Reaffirm

The difficulty lawmakers had agreeing to the deficit- reduction package helped push S&P to cut the rating, the agency said, because it indicates how much trouble Congress will have addressing more fundamental budget issues.

Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. on Aug. 2, the day Obama signed the bill ending the debt-ceiling impasse.

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 and considered it a rush to judgment. The person said the differing verdicts from the agencies may limit the impact of the S&P move.

The debt deal includes $917 billion in spending cuts approved over the next decade intended as a down payment on further reductions. The agreement calls for a so-called super committee to be comprised of six Republican lawmakers and six Democrats charged with finding up to $1.5 trillion more in a report due by Nov. 23.
Automatic Cuts

If the committee is unable to agree on a plan or if its recommendations are rejected by Congress before year’s end, there would be an automatic $1.2 trillion in across-the-board reductions put into effect, beginning in January 2013.

“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, managing director of Barclays Capital in New York.
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S&P has issued increasingly insistent demands over the past year that lawmakers address long-term deficits. Last October, it said Congress had as many as five years to address the issue. In April, the agency said there was a one-in-three chance of a downgrade within two years. Last month, it said there was a 50 percent chance it would downgrade the government debt within 90 days without a “credible” deficit plan.
‘Wake-Up Call’

Ten-year Treasury yields fell to as low as 2.33 percent in New York yesterday, the least since October. Treasury yields average about 0.70 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January.

House Speaker John Boehner, an Ohio Republican and one of the architects of the deficit-reduction plan, reacted to the downgrade by saying “it is my hope this wake-up call will convince Washington Democrats that they can no longer afford to tinker around the edges of our-long debt problem.”

Senate Majority Leader Harry Reid, a Nevada Democrat who also helped write the plan, said the announcement “reaffirms the need for a balanced approach to deficit reduction that combined spending cuts with revenue-raising measures.”
Drawing a Line

Obama had been pushing throughout his talks with Republicans on the debt deal for what he termed the “balanced” approach that would include some measures to increase federal revenue along with spending cuts. While he was willing to accept tax increases that were dwarfed by spending reductions, Republicans drew a line against any policies that could be construed as raising taxes.

Senator Jim DeMint, a South Carolina Republican and favorite of the fiscally conservative Tea Party movement who voted against the debt deal, claimed vindication.

“The deal was not a serious attempt to solve our spending and debt problem -- it was a political solution meant to kick the can down the road,” he said.

S&P, though, noted in its report that the failure to act on raising revenue also was a consideration in its decision.

“We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues, is less likely than we previously assumed,” the company said.
‘Danger Zone’

S&P also changed its assumption 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.”

Democratic strategist Bill Carrick said Republicans shouldn’t view themselves as not also being in harm’s way from the repercussions in the deficit dispute.

“The danger zone here for the Republicans is instead of being free to bash the president, now they are sort of part of the problem,” said Carrick, who is based in Los Angeles. Republicans are vulnerable to criticism that they have an “unwillingness to compromise,” he added.

More than four out of five people surveyed in the New York Times/CBS Poll said the debt-ceiling debate was more about gaining political advantage than doing what is best for the country. Republicans in Congress get more of the blame for the difficulties in reaching an agreement than the Democrats, according to the poll, conducted Aug. 2-3.
‘Attack Ads’

The survey showed that 72 percent disapproved of the way Republicans in Congress handled the talks, while 66 percent disapproved of the conduct by Democrats. The poll of 960 adults has an error margin of plus-or-minus 3 percentage points.



Stuart Rothenberg, editor of the Washington-based Rothenberg Political Report, said S&P’s skepticism over the capacity of Congress and the administration to leverage its agreement into a broader plan to address the debt should be “a kick in the behind for both parties.”

Still, Bonjean, the Republican strategist based in Washington, said Obama will bear the brunt of the fallout from the downgrade.

“The attack ads will be cut instantly, because he’s the president who was in charge when our country’s downgraded for the first time in history,” he said.

Referring to a trip Obama has scheduled Aug. 15-17, Bonjean also said, “I would not want to be President Obama on a bus tour through the Midwest listening to Americans who are out of work or had interest rates raised on their loans, or are fearful of economic instability.”

© Copyright 2014 Bloomberg News. All rights reserved.

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