President Barack Obama begins a tour promoting his proposal to cut long-term budget deficits with a new urgency after Standard & Poor’s warned that the nation’s credit rating is in peril.
While the trip that begins today with a town-hall meeting in Virginia is partly billed as an effort to gain support for cuts in popular programs, Obama administration officials said they don’t expect him to refer to the S&P report unless he is asked.
Chris Lehane, a Democratic strategist who worked on Al Gore’s 2000 presidential campaign, said any president would prefer to minimize attention to an unfavorable assessment of the nation’s creditworthiness.
Local newspapers and television stations would be likely to report “‘Wall Street questions U.S. long-term credit because of political paralysis in Washington,’” Lehane said. “That’s not the headline you want when you’re looking at re-election.”
Obama is scheduled to spend three days traveling through states crucial to his 2012 re-election campaign to publicize his plan to reduce cumulative deficits by $4 trillion over 12 years. The plan includes spending cuts on defense and domestic programs and calls for raising taxes on the wealthy.
He will hold town-hall meetings at 10:15 a.m. today in Annandale, Virginia, and later in the week at Facebook Inc.’s headquarters in Palo Alto, California, and in Reno, Nevada.
On the eve of the tour, Obama underlined his commitment to reducing the deficit in a series of interviews with local television anchors in swing states.
“We’ve got to make sure we’re living within our means,” Obama told a Raleigh, North Carolina, television station.
Need a Plan
S&P said the government risks losing its AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt. The New York-based company maintained its top rating on U.S. long-term debt while lowering the outlook to “negative” for the first time.
The White House downplayed the negative outlook, saying it was based on a faulty appraisal of the political climate.
Austan Goolsbee, the chairman of Obama’s Council of Economic Advisers, said yesterday that the outlook was based on a “political judgment” on prospects for a deficit-reduction agreement that doesn’t deserve “too much weight.”
Some Democratic allies questioned S&P’s reliability, citing the top rating it gave to mortgage-backed securities that later crashed in value and contributed to the 2008 financial crisis.
“Given that the Financial Crisis Inquiry Commission called the credit rating companies ‘key enablers of the financial meltdown,’ it’s difficult to know how much credibility S&P should be given,” said Paul Begala, a Democratic strategist who helped to run Bill Clinton’s first presidential campaign in 1992 and served in the Clinton White House as a political adviser.
Republicans and Democrats in Congress used the rating service’s decision to bolster their competing arguments about addressing the government’s finances.
House Majority Leader Eric Cantor, a Virginia Republican, called the S&P warning “a wake-up call for those in Washington asking Congress to blindly increase the debt limit” without significant spending cuts.
Members of the so-called Gang of Six, a group of six Democratic and Republican senators who are seeking to negotiate a compromise deficit-reduction plan, said the S&P move shows the markets are watching for signs that policy makers will confront the debt.
“If we fail to take this seriously, and if our deficit and debt discussions turn into just another game of political brinksmanship, this could result in the most predictable economic crisis in our history,” Senator Mark Warner of Virginia, the Democratic leader of the group, said in a statement.
Senator Tom Coburn of Oklahoma, a Republican member of the group, said the S&P’s change should create a sense of urgency for tackling “our debt crisis.”
The White House said yesterday that Vice President Joe Biden will open a round of negotiations with members of Congress on long-term deficit reduction with a meeting at Blair House on May 5.
The Obama administration has been bracing for the change in outlook for about two months as S&P reviewed its assessment of U.S. debt. During the period, David Beers, the head of the company’s public finance unit, was in touch with Mary Miller, the assistant Treasury secretary for financial markets, according to a person familiar with the discussions.
About 10 days ago, Treasury Department officials gained a stronger sense that S&P would issue a negative outlook, the person said. That was shortly before the April 13 speech in which Obama presented his deficit plan.
Not In Denial
While Treasury officials sought to persuade the company that Congress and the administration were determined to reduce the deficit, S&P told the Treasury Department of its final outlook on the afternoon of April 15 and of its plan to make an announcement yesterday.
White House and Treasury officials prepared their response over the weekend, seeking to convey a message of optimism without appearing to be in denial about the challenges of reaching an agreement on long-term deficits, said the person familiar with the discussions.
Less than half an hour after the S&P announcement, Miller released a statement saying the outlook “underestimates the ability of America’s leaders to come together.”
First Since 1996
The announcement was the first time the U.S. credit outlook has been questioned since 1995 and 1996, when a dispute between Clinton and House Speaker Newt Gingrich, a Georgia Republican, led to two government shutdowns. Fitch Ratings put U.S. debt on a “negative ratings watch” in November 1995 until spring 1996, and Moody’s Investors Service put some U.S. government bonds on review for a possible downgrade in January 1996.
The S&P 500 index was down 1.1 percent at the 4 p.m. close of trading yesterday to 1,305.14 after declining as much as 1.9 percent. The Dow Jones Industrial Average fell 140.24 points, or 1.1 percent, to 12,201.59.
The yield on the benchmark 10-year Treasury note jumped as high as 3.45 percent yesterday in the minutes after the S&P report. The yield was back down to 3.37 percent at 4:27 p.m. in New York yesterday as investors focused on speculation that Greece will be unable to avoid a default, driving them to the relative safety of U.S. debt.
In trading today, 10-year yields were little changed at 3.38 percent as of 10:27 a.m. in Tokyo, according to Bloomberg Bond Trader prices, as Japanese Economic and Fiscal Policy Minister Kaoru Yosano said U.S. Treasuries are “extremely good- quality securities.”
A gauge of the dollar advanced the most since November against the currencies of major trading partners on increased demand for a refuge as Europe’s debt crisis outweighed the negative S&P U.S. credit-rating outlook.
IntercontinentalExchange’s Dollar Index increased 0.9 percent to 75.508 at 5 p.m. in New York yesterday, from 74.832 on April 15. The gauge, which tracks the dollar against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, earlier gained 1.3 percent in the biggest intraday advance since Nov. 23 and touched 75.810, the highest level since April 7.
The dollar appreciated 1.4 percent to $1.4235 per euro in New York from $1.4430 on April 15. The U.S. currency decreased 0.6 percent to 82.66 yen from 83.13.
--With assistance from Roger Runningen, Julianna Goldman, Ian Katz, Rebecca Christie, Nicholas Johnston and Julie Hirschfeld Davis in Washington, Wes Goodman in Singapore and A. Catarina Saraiva in New York. Editors: Mark McQuillan, Leslie Hoffecker
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