U.S. Credit Rating in Jeopardy as Debt Ceiling Negotiations Get Tense

House Majority Leader Eric Cantor accused President Obama of “abruptly” and “angrily” ending the debt limit negotiations Wednesday night at the White House. The United States' credit rating may be downgraded if parties do not reach an agreement soon.

Republicans and Democrats gave different accounts of what actually happened. A Democratic source told The Hill that Cantor's account of what happened was overblown. Obama “said what he was going to say, he got up and walked out,” the source said.

The heated exchange that preceded Obama's walkout had to do with the size of the debt limit increase. Obama has said that he wants an increase large enough that Congress will not have to revisit the issue until after the 2012 elections.

According to Cantor, after he interrupted Obama a third time to suggest a smaller debt limit increase, Obama told him, “Eric, don't call my bluff. Would Ronald Reagan be sitting here? This may bring my presidency down, but I will not yield on this.”

Republicans have said that they want spending cuts at least as large as the debt limit increase, which would have to be about $2.4 trillion to last past the 2012 elections. Since Obama has taken a small debt-limit increase off the table and Republicans have taken revenue increases that are not offset by tax cuts off the table, negotiators have few options left to reach a compromise.

So far, $1.4 to $1.5 trillion in spending cuts have been agreed to. Obama supposedly offered an additional $200 billion in cuts in Wednesday's meeting, which would bring the total to as much as $1.7 trillion. Democrats oppose any larger package that does not include some revenue increases along with spending cuts.

Democrats want Republicans to give on one of their two non-negotiable terms. Republicans should either allow for an additional $700 billion or so in increased revenue, or they should allow an increase in the debt limit larger than the agreed upon deficit reductions, Democrats believe. Republicans are now asking for a smaller debt ceiling increase so they have time to negotiate a larger debt ceiling increase later on.

Despite the heated exchange between Obama and Cantor, the parties may be closer to a deal because the choices before them are more clear, according to the Wall Street Journal.

“Republicans can either give in on their opposition to tax increases or back off of their demand for spending cuts that match or exceed the amount of a borrowing-limit increase. Or Democrats can accept more spending cuts and retreat from their insistence on tax increases,” write Carol E. Lee and Janet Hook.

The need to find compromise may be spurred today by a statement from Moody's, the credit rating agency, on Wednesday that the United States' credit may be downgraded.

“Moody's Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations,” Moody's said in its report. Aaa is the highest possible bond rating. The rating will likely be lowered to Aa if a deal is not reached by August 2. A lower bond rating would mean the federal government would have to pay a higher rate of return to its lenders.

Moody's also warned that a debt limit increase would not be sufficient to prevent a lower bond rating. The federal government would also need to show that it has taken steps towards financial stability.

“To retain a stable outlook, such an agreement should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years,” said Moody's.

A settlement between Republicans and Democrats that does not, therefore, include either spending cuts, revenue increases, or some combination of spending cuts and revenue increases, would also lead to a credit rating downgrade.

Debt-ceiling negotiators are getting mixed messages from the public in recent polls.

In a Gallup poll conducted July 7-10, Americans were asked whether Congress should reduce deficits only with spending cuts, mostly with spending cuts, equally with spending cuts and tax increases, mostly with tax increases, or only with tax increases.

Only 20 percent of respondents replied that Congress should cut the deficit with spending cuts only. Even among Republicans, a small portion, 26 percent, want spending cuts only. A plurality of Republicans, 41 percent, answered “mostly with spending cuts.” A plurality of Democrats, 42 percent, answered “equally with spending cuts and tax increases.”

The same poll showed, however, that most Republicans, 60 percent, but few Democrats, 21 percent, want their member of Congress to vote against raising the debt limit. A plurality of independents, 46 percent, take that position.

Obama may invite congressional leaders to stay with him at Camp David, a presidential retreat, this weekend to continue the negotiations. Camp David has been used as a place to broker deals in the past. In a situation more similar to this one, President George H. W. Bush brought Republicans and Democrats to Camp David in 1990 to work out a budget deal. Those negotiations led to a budget compromise that included both tax increases and spending constraints. Bush was later criticized for breaking his “read my lips, no new taxes” pledge when he signed that bill. Camp David is also well-known for the Camp David Accords, in which President Jimmy Carter brokered a peace deal between Egypt and Israel.

Camp David offers some advantages over staying in Washington. It would offer a more relaxed atmosphere and both sides would be able to spend more time on the issue. Also, neither side would need to spend time worrying about how they will present their views to the press before and after every meeting.

House Minority Leader Nancy Pelosi (D-Calif.) and Speaker of the House John Boehner (R-Ohio) both said, in separate news conferences on Thursday, they see no need to move negotiations to Camp David over the weekend.

The debt limit controversy highlights some fundamental differences between the two parties on the size and role of the federal government. Republicans believe the federal government is too large, inefficient, and intrusive (especially in the marketplace). They would like to use the current debate to cut or limit the growth of the federal government.

Democrats, on the other hand, want a more expansive role for the federal government. They want the federal government to take a larger role in regulating businesses, providing health care, and providing social programs for the poor and elderly. Democrats mostly find themselves playing defense in this debate by trying to prevent cuts to some of their favored programs, such as Social Security, Medicare, and Medicaid.

The national debt is almost $14.5 trillion with over $114.6 trillion in unfunded liabilities.

The Gallup poll had 1,016 respondents with a margin of error of +/- 4 percent.

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