Economy Watch: Progress on U.S. Debt Ceiling Still Unclear

The rumor mill was in high gear on Capitol Hill on Thursday as vague stories of Deal or No Deal on the debt ceiling were fast and thick. A solution of sorts to the Greek debt crisis seemed to emerge on Thursday, and the Leading Economic Index for the U.S.

July 22, 2011
By Dees Stribling, Contributing Editor

John Boehner
Courtesy Flickr Creative Commons user Medill DC

The rumor mill was in high gear on Capitol Hill on Thursday as vague stories of Deal or No Deal on the debt ceiling were fast and thick, but actual authoritative reports on resolving the issue were not. Various Senate Democrats were reportedly apoplectic when word of a no revenue-all cuts deal emerged, something the White House immediately denied. House Speaker John Boehner also denied the existence of a deal, but also talked of “Plan B,” whatever that is at the moment. All in all, any progress on the debt ceiling is currently obscured by a thick Washington fog.

Standard & Poor’s warned on Thursday that merely raising the debt ceiling isn’t going to be enough for the United States to keep its top-drawer AAA rating. There also has to be some kind of long-term debt-reduction plan that emerges from the hubbub in Congress at the moment. “Depending on how these issues are resolved, the current impasse could potentially — though not inevitably — cause widespread negative rating actions among U.S. public finance issuers in all sectors,” the agency said in a report earlier this week. “For any agreement to be credible, we believe it would require support from leaders of both political parties.”

A number of House Republicans reportedly met in private with a “top official” from Standard & Poor’s on Thursday who told them under what circumstances the nation’s credit rating would be downgraded, and what that would mean for the economy. The gist of the official’s message seemed to be 1) raise the debt ceiling already and 2) kicking the can down the road would be a bad substitution for number 1.

EU Leaders Unveil Latest Greek-Debt Plan

A solution of sorts to the Greek debt crisis seemed to emerge on Thursday from the political leaders who stand to have the most egg on the faces if the Euro-zone turns out to be a failure: Germany and France, as well as the president of the European Central Bank. The idea is debt relief for Greece, along with Ireland and Portugal before long. Just don’t call it a default, even though technically it seems to be one.

Previously any talk of modifying the terms of Greek debt was met with the sort of shock and dread bankers and bondholders usually muster on such occasions (unless it’s their own debt), and so the idea got nowhere even as it might have conceivably prevented international crises associated with Greek debt and some rioting as well. But with the abyss of multiple euro-zone defaults staring them in the face, the panjandrums of the euro currency evidently decided that some painful losses are better than a massive painful loss.

Whose pain? Euro zone taxpayers, for one, who will be funding a new bailout for Greece and a “stimulus program” that will “mobilize EU funds” for that country. It isn’t all clear how this will sit with German and French taxpayers. Also under the plan, banks and bond holders are will contribute $53 billion by rolling over Greek debt on a “voluntary basis” and accepting lower yields and longer terms, which will amount to something of a haircut. It’s voluntary because bondholders can opt to do nothing and hope against hope that Greece will pay them back as originally specified, but who’s going to do that?

Conference Boards Leading Indicators Edge Upward

The Conference Board said on Thursday that its Leading Economic Index for the U.S. increased 0.3 percent in June to 115.3 (2004 = 100), following a 0.8 percent increase in May and a 0.3 percent decline in April. The largest positive contributions came from money supply, the interest rate spread, and building permits.

“The economy faced some recent unexpected headwinds, including a shortage of auto and electronic parts from Japan after the earthquake, and damaging tornado and flooding activity in the U.S.,” Ken Goldstein, an economist at the Conference Board, said in a statement, followed by (perhaps) an understatement: “Another potential headwind is the debt ceiling issue, which could result in a financial crisis in the near term if not resolved.”

Investors didn’t seem to be worried about the foggy conditions in Washington on Thursday as more optimistic reports came in about the euro-zone deal on Greek debt. The Dow Jones Industrial Average gained a sizable 152.5 points, or 1.21 percent, while the S&P 500 was up 1.35 percent and the Nasdaq advanced 0.72 percent.