House Speaker John Boehner’s appearance before Wall Street leaders tonight challenges him to provide reassurance that Congress will raise the U.S. debt limit without undercutting Republican demands for spending controls.
Investors attending Boehner’s speech to the Economic Club of New York dinner will be listening for the Ohio Republican to describe the path to an agreement on raising the debt ceiling and installing new deficit controls between the Republican-run House and Democrats led by President Barack Obama.
“What Wall Street wants to hear is that they are going to raise the debt ceiling in a timely way,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.
Investors expect “policy makers are going to negotiate and debate, but at the end of the day” they want assurances that “when it comes down to brass tracks they are going to raise that debt ceiling,” Zandi said.
Following his speech, Boehner, 61, will be questioned by Peter G. Peterson, co-founder of Blackstone Group LP, and Jane Hartley, chief executive officer of Observatory Group LLC, an economic consultant.
Boehner, who negotiated an 11th-hour package of $38 billion in spending cuts to avert a government shutdown last month, will explain to results-oriented investors that without budget reforms there are not enough votes in the Republican-run House to raise the debt ceiling, said a Republican leadership aide speaking on condition of anonymity.
Republican Hard Line
“He’s got to take a hard line” on Republican demands for new spending controls to control spiraling government deficits, said Republican strategist Ron Bonjean.
The speaker will be able to give Wall Street some reassurance by taking credit for “forcing Democrats to the table to negotiate spending cuts,” he said.
Boehner can’t go any further because “you can’t tell Wall Street with a wink and nod that you are going to raise the debt limit because it will definitely affect our bargaining position with the White House,” said Bonjean, once an aide to former House Speaker Dennis Hastert.
He can tell investors the government “won’t have to exceed the debt limit” because there are negotiations and “Democrats are willing to participate in that end game,” Bonjean said.
The speaker can also cite broad public support for deficit reduction that will give Democrats a political incentive “to try to figure out some kind of package” of spending cuts and budget reforms, Bonjean said.
The government will reach the $14.29 trillion debt limit no later than May 16, though Treasury Secretary Timothy Geithner says the government can keep borrowing by taking “extraordinary measures” until Aug. 2.
In an April 28 speech, Geithner said economic damage could occur if credit markets react just to “the possibility, however remote, that the U.S. might default”
“What the market would like to hear is that the two parties are reasonably close to agreeing on something and the debt ceiling will be raised,” said Ajay Rajadhyaksha, who runs the fixed-income trading for the Barclays Capital Inc. unit of Barclays Plc.
Wall Street is looking for such a deal to be struck by early July, both Rajadhyaksha and Zandi said.
If the negotiations drag out much longer than that “the dynamics of the thing could change quite rapidly as investors could get quite nervous,” Zandi said.
“The worst-case scenario is I am sitting here talking to you at the end of July and the debt ceiling has still not been raised,” Rajadhyaksha said.
The talks got under way May 5 at a negotiating session hosted by Vice President Joe Biden where both sides outlined their demands at a negotiating session.
Republican leaders signaled that their plan, included in the House-passed 2012 budget resolution, to privatize Medicare for future beneficiaries who are now younger than age 55 was on hold during the discussions about the debt limit.
Boehner said the political realities dictated that the Medicare plan was unlikely to pass Congress with Democrats in control of the Senate. He made the comment when asked why Dave Camp, the Republican chairman of the House Ways and Means Committee had said he didn’t plan to push the Medicare plan because it would likely die in the Senate.
Still, Boehner, who is represented at the talks by House Majority Leader Eric Cantor of Virginia, told reporters at his May 5 press conference that “nothing is off the table except raising taxes.”
The speaker vowed that Republicans “will not increase the debt limit without real spending cuts and budget reform.”
Cantor blamed Obama for refusing to consider the Medicare plan as part of the debt-ceiling discussions. “The reality is this president has excoriated our budget plan and the Medicare proposal,” Cantor said. The Republican leader said the Medicare plan, as well as other elements of the House-passed budget plan to cut $6 trillion over 10 years, “will be the subject of future meetings.”
So far, the markets have shown few, if any, signs of investor anxiety. The yield on the benchmark 10-year note was 3.15 percent on May 6, down from an average of 4.33 percent from 2000 through 2010 on a weekly basis.
Zandi said investors understand the negotiations in Washington are complicated and contentious. They wouldn’t be “too upset there is a fair amount of negotiations and debate, he said.
More important than the content of Boehner’s message is “how he says it and his demeanor and his level of confidence,” Zandi said. It’s “very, very important” that Boehner “convinces people that policy makers really understand what the stakes are.”
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