Supercomittee Failure Poses Threat to U.S. Recovery

The implosion of the congressional supercommittee is likely to delay any major deficit-reduction agreement until after the next presidential election and may pose an immediate threat to the struggling U.S. economy.

The committee’s failure to reach a deal means several tax programs, including a payroll tax holiday, risk expiring at the beginning of next year, weighing on the household spending that accounts for about 70 percent of the world’s largest economy.

The panel’s inability to agree on $1.2 trillion in budget cuts, which drove stocks down yesterday and Treasuries higher, also stoked doubts about U.S. lawmakers’ ability to overcome partisan gridlock and safeguard the nation’s fiscal health.

“They could not agree even on the smaller challenge of $1.2 trillion,” said former White House budget director Alice Rivlin, among a coalition of officials who pushed the panel to “go big” and find $4 trillion in savings, in an e-mail. “I do not see a way to get to the big deal before the election, if then. It is really discouraging!”

Still, Standard & Poor’s reaffirmed it would keep the U.S. credit rating at AA+ after stripping the government of its top AAA grade on Aug. 5. Moody’s Investors Service reaffirmed its AAA rating with a negative outlook. Fitch Ratings noted in a statement that it said in August that a supercommittee failure would probably result in a “negative rating action,” likely a revision of its outlook to negative, and that a review would be concluded by the end of this month.
Trigger in Jeopardy

S&P said its rating would stand because the committee’s failure triggers $1.2 trillion in automatic spending cuts, which were put in place in the event no compromise could be reached. Easing those automatic spending limits may cause “downward pressure on the ratings,” S&P said in a statement.

That so-called trigger may be in jeopardy, with both Democrats and Republicans leery of steep cutbacks at the Pentagon that Defense Secretary Leon Panetta has called “Draconian.” Congress has succeeded in the past in undoing debt-reduction enforcement mechanisms.

Republican Senators Lindsey Graham of South Carolina and John McCain of Arizona already are looking for other cuts to take the place of those the Pentagon faces. Representative Howard McKeon of California said he’ll introduce legislation to prevent the spending reductions to defense.

“They have to really be careful not to mess with that,” said Robert Bixby, head of the nonpartisan Concord Coalition, which presses for debt reduction. “To dismantle it would be totally unacceptable.”
Economic Risk

Investors have largely shrugged off S&P’s August downgrade of U.S. debt to AA+ from AAA. After the move by the ratings company, the government’s borrowing costs fell to record lows as Treasuries rallied.

The yield on the benchmark 10-year Treasury note fell from 2.56 percent on Aug. 5 to below 1.72 percent on Sept. 22. The yield on the 10-year note declined 6 basis points, or 0.06 percentage point to 1.96 percent in New York yesterday, according to Bloomberg Bond Trader prices. The Standard & Poor’s 500 Index dropped 1.9 percent to 1,192.98.
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Joell Ortiz