Quarrelling Congress can still cut US debt deal, says top Republican

By:
Published on:

Republicans and Democrats seem to be inching towards to a deal that would raise the United States’ debt ceiling and avoid a damaging government shutdown – or even a sovereign default – a senior Republican strategist has told RBS.

Beth Myers, who was Chief Strategist to Mitt Romney during last year’s presidential campaign, said relations between the two parties remained fragile but had improved sufficiently from President Obama’s first term for there now to be meaningful talks. “The mood is less bothersome than it has been for the last four years,” Myers said before a meeting with RBS clients in London. “We are back to some degree of normalcy: talking about how the process is going to run, rather than whether a process even exists.” US debt is expected to touch the $16.4 trillion limit mandated by Congress, on May 19. The country could technically default unless lawmakers raise that debt ceiling once again. Though the US Treasury is likely to use stop-gap measures to continue borrowing and servicing the debt for several months beyond that, the US could face a fiscal crisis by late summer if a new limit is not agreed. Deficit hawks in the Republican Party such as Budget Committee Chairman Paul Ryan strongly oppose raising the debt ceiling without first seeing a comprehensive deficit reduction plan in place. “The deficit hawks see the ceiling as one of the few ways to keep a lid on the debt,” said Myers. Republicans, who hold the House of Representatives, oppose further tax increases and instead want spending cuts to reduce the deficit. Their Democratic opponents, who control the Senate and Presidency, favour a mixture of tax increases for the wealthiest and modest cuts in so-called entitlement programmes for the less-well off. “The Republicans swallowed tax increases (in fiscal cliff negotiations) for next to nothing. The people I’ve talked to who are active in these negotiations seem fairly certain they are not going to take any more (tax) bracket increases.” Despite the divide, Myers said the gap could be bridged. Republicans might be standing firm on further tax rises but they could be willing to give ground on closing tax loopholes to raise revenue. In exchange, the White House has indicated it would propose a budget with cuts to social security, pensions and Medicare, with savings partly paid for by a change in the measure of inflation used to calculating pension increases. “I believe a solution will come from more aggressive tax reform than the Republicans want, and more benefit cuts than the Democrats want,” said Myers, who is one of the most experienced Republican strategists on Capitol Hill. “Republicans want to relieve the debt but they don’t want to go to war on spending cuts.” A protracted battle over the debt ceiling would send a shudder through global markets as investors began thinking the unthinkable – a US default. Even a brief failure to make payments on treasury bonds would spark confusion, a surge in borrowing costs, a sell-off in riskier assets and could ultimately paralyse the financial system. Myers said Democrats, who were holding out hopes of overturning the Republican’s majority in the House of Representatives next year, had started to take a more sober view of their chances and had shown greater cooperation as a result. Emblematic of that was the President’s charm offensive towards Republican congressmen, led by his new ‘can do’ chief of staff Denis McDonough. “The Democrat Party is polling like mad and I think he will come to the conclusion that he cannot get the House back in 2014. He will look for ways for a settlement through small concessions from both sides”. Standard & Poor’s downgraded the US after the last major debt ceiling battle in 2011, citing what the ratings agency said was the country’s inability to manage its fiscal policy. The strain America’s generation of baby boomers will soon place on social security and healthcare has added urgency and heat to the debate. “Our debt is a huge problem and over the medium term we cannot sustain it. That makes this a critical discussion,” she said, adding an important caveat: “Ultimately, I don’t think either party will let a default happen”. Former Treasury Secretary Timothy Geithner has argued the US should completely abandon the debt ceiling because of its destabilising influence. Myers said that idea was a non starter given that shrinking the debt burden was such a central theme in Republican thinking. “The question isn’t even on the table. The Republicans wouldn’t bend on that. They believe the debt an existential threat to the United States.” 

For more RBS Insight content, click here

Disclaimer The contents of this document are indicative and are subject to change without notice. This document is intended for your sole use on the basis that before entering into this, and/or any related transaction, you will ensure that you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc (“RBS”) will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on RBS for investment advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information and disclaims all liability for any use you or your advisers make of the contents of this document. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed. Where the document is connected to Over The Counter (“OTC”) financial instruments you should be aware that OTC derivatives (“OTC Derivatives”) can provide significant benefits but may also involve a variety of significant risks. All OTC Derivatives involve risks which include (inter-alia) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity risk and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place to manage such risks. Therefore you should also determine whether the OTC transaction is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding, or acting as market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein. RBS is authorised and regulated in the UK by the Financial Services Authority, in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the United States Securities Act of 1933, as amended. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC (www.sipc.org) member and subsidiary of The Royal Bank of Scotland Group plc. Dubai International Financial Centre: This material has been prepared by The Royal Bank of Scotland plc and is directed at “Professional Clients” as defined by the Dubai Financial Services Authority (DFSA). No other person should act upon it. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a “Professional Client”. This document has not been reviewed or approved by the DFSA. Qatar Financial Centre: This material has been prepared by The Royal Bank of Scotland N.V. and is directed solely at persons who are not “Retail Customer” as defined by the Qatar Financial Centre Regulatory Authority. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a “Business Customer” or “Market Counterparty”. The Royal Bank of Scotland plc acts in certain jurisdictions as the authorised agent of The Royal Bank of Scotland N.V.

The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB