July 14 (Bloomberg) -- President Barack Obama may summon congressional leaders to a Camp David summit this weekend after the latest round of White House negotiations on the deficit ended on a tense note and Moody’s Investors Service warned the stalemate could jeopardize the U.S.’s credit rating.
Obama told the lawmakers they have until tomorrow to decide whether they can reach a deal to cut the deficit or settle for a way to raise the $14.3 trillion debt ceiling before U.S. borrowing authority expires Aug. 2, two Democratic officials said.
The increasing tension between Democrats and Republicans was underscored by dueling accounts of a White House meeting that ended sourly. Obama “got very agitated” and left the room after House Majority Leader Eric Cantor suggested a vote on a smaller deal, Cantor said in an interview. “Don’t call my bluff; I am going to the American people,” Obama said, according to Cantor, a Virginia Republican.
While Democratic officials disputed that characterization of Obama’s demeanor, the White House concedes it may have to accept a smaller accord as Republican opposition to tax increases hardens and both sides acknowledge a government default could send the U.S. economy into a tailspin.
Federal Reserve Chairman Ben S. Bernanke told the House Financial Services Committee yesterday that failure to raise the debt limit would lead to a “huge financial calamity” that could add to unemployment. Unless the debt ceiling is raised, he said, the economy could be in greater peril than when Lehman Brothers Holdings Inc. went bankrupt in September 2008.
Few Options Left
Both sides have few options for resolving the standoff quickly. Obama said he would veto any plan that doesn’t raise the debt ceiling through the 2012 elections. Republicans are demanding $2 trillion or more in spending cuts without any tax increases.
Democratic officials, speaking on condition of anonymity, disputed Cantor’s assertion that Obama’s departure was abrupt and said the president had emphasized he believed the lawmakers were engaging in too much political posturing.
In a sign of concern within the financial community, the U.S.’s Aaa bond rating was put under review by Moody’s, a possible prelude to a downgrade that would trigger higher borrowing costs.
“There is a small but rising risk of a short-lived default,” Moody’s said.
Repeal Tax Cuts
As part of a broader $4 trillion accord, Obama was poised to accept cuts to Medicare, Medicaid and possibly Social Security in exchange for $1 trillion in revenue, mostly from repealing President George W. Bush’s tax cuts for the wealthiest Americans after 2012.
Absent that tradeoff, the two sides had identified about $1 trillion in discretionary spending cuts and $500 billion in other savings from agriculture subsidies and other non-health- care-related spending.
That isn’t enough for the $2 trillion minimum in spending cuts that House Republicans are demanding in exchange for raising the debt ceiling through the next election. The White House insists that any deal of that magnitude must include more revenue.
The stalemate prompted Senate Minority Leader Mitch McConnell this week to offer a “last-choice” plan to give Obama unilateral power to raise the debt ceiling, in an effort to put the onus on the president to identify spending cuts. The idea drew criticism from both sides of the aisle, particularly from Republicans who said it would fail to curb spending.
Echoes of 1995
Recounting how the 1995 government shutdown helped President Bill Clinton win re-election the following year, McConnell warned fellow Republicans any impasse that drove down the nation’s credit rating and led to government checks being delayed could have the same result for Obama.
“He will say Republicans are making the economy worse,” McConnell said in an interview with radio host Laura Ingraham. “It is an argument that he could have a good chance of winning, and all of the sudden we have co-ownership of the economy. That is a very bad position going into the election.”
Senate and House leaders, reacting cautiously to McConnell’s proposal, are exploring ways to modify it as a backstop to prevent a government default. While Republicans are pressing for hard spending caps, the White House would only accept setting a ceiling on future deficits, perhaps by tying them to a percentage of the gross domestic product. Senate leaders are also discussing a commission with enforcement powers, according to a congressional aide.
Payroll Tax Holiday
Obama and the lawmakers discussed discretionary and other spending yesterday and plan to discuss health care and revenue, including a employer payroll tax holiday, at a meeting scheduled for today at the White House, a Democratic official said.
A final decision on a possible Camp David retreat in the Maryland mountains hasn’t been made, said the people, who requested anonymity.
Cantor told reporters that the amount of cuts under discussion has shrunk to less than $1.4 trillion in part because he said the administration is seeking additional spending on unemployment benefits and health-care programs. Cantor said he proposed having multiple votes into next year to raise the debt limit in stages, which he said Obama rejected.
“We’re so far apart and going back on the momentum,” Cantor said.
Shortly before Obama’s departure from the meeting, he told Republicans they had two choices: Either accept revenue increases for a $2.4 trillion deal or take a deal of a lesser amount and give up on their demand for dollar-for-dollar spending cuts to match an increase in the debt ceiling so the borrowing authority will go through the election.
The gamesmanship may already be putting the U.S. credit rating at risk.
The announcement by Moody’s was “the news that we have dreaded,” said House Democrat Robert Andrews of New Jersey. “I am fearing that much worse news will be right around the corner. I hope this very unwelcome news shakes people into a sense of reality.”
U.S. stock-index futures fell and the euro strengthened versus the dollar after Moody’s said U.S. may lose the Aaa credit rating it has held since 1917.
House Minority Leader Nancy Pelosi, a California Democrat, said in a statement that Obama has listened to congressional leaders’ suggestions “at extensive meetings over the past few weeks, and now we have a responsibility to act.”
--With assistance from Mike Dorning, Julie Hirschfeld Davis, Laura Litvan and Brian Faler in Washington. Editors: Jim Rubin, Mark McQuillan.
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