Political brinkmanship over debt ceiling rattles markets

Cuts unlikely to hurt Israel, Capitol Hill sources say Jewish state still major priority for US foreign aid.

Obama White House speech 311 (photo credit: REUTERS/Jim Watson/Pool)
Obama White House speech 311
(photo credit: REUTERS/Jim Watson/Pool)
US President Barack Obama signed legislation lifting America’s debt ceiling Tuesday and avoiding a potentially costly default on US debts.
The measure is part of a package of severe cuts to offset the amount of the debt ceiling increase, negotiated in marathon sessions of both houses of Congress and passed into law with a 343-187 split, just hours before the US Treasury warned it would start running out of money.
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“Congress has now approved a compromise to reduce the deficit and avert a default that would have devastated our economy,” Obama said in signing the historic deal. “It’s an important first step to ensuring that as a nation we live within our means.”
The new legislation mandates some $2.4 trillion in deficit and debt reduction – or roughly the amount of the increase in the debt ceiling – over 10 years that would leave few corners of the American economy untouched, according to Congressional projections.
Defense and foreign operations spending would be among those affected, and some members of Congress who objected to the deal are citing those areas as reason to vote against it, arguing it would jeopardize America’s international posture.
While the proposed cuts at this point are mostly too vague to address country-specific allocations – such as aid to Israel – several sources on Capitol Hill said that funding for the Jewish state continues to be a priority for the US and was unlikely to change.
They pointed to Congress’s approval of record aid for Israel this year, despite the poor economic state of the country and a new group of freshman in the GOP-controlled House determined to cut spending.
Just over $900 billion of those cuts are to be implemented immediately in the form of spending caps – $5 billion from the defense budget in 2012 and 2013 alone, according to Congressional figures.
The deal under consideration could also trigger another massive across-the-board spending cut of some $1.5 trillion if a bipartisan congressional committee doesn’t reach a more detailed agreement on how to make sufficient cuts to reach that figure, which is then passed by the end of the year.
The potential across-the-board cuts would create more uncertainty about which programs faced the knife – especially in spending for the joint missile defense program between the US and Israel.
In contrast to the missile-defense program, other US foreign aid to Israel – currently at some $3 billion a year – is governed by a signed memorandum of understanding between the two countries that is less likely to be abrogated.
“I’m pretty sure Israel’s going to be fine. They were able survive all the other cuts of the past year,” said one aide to a member of Congress on the defense appropriations committee.
But he said that the committee has been increasing the amount of aid to the joint missile defense program each year, slated for $235.7 million for 2012, and that such additions would be much more difficult under a Congress committed to slashing.
“[US-Israeli] missile defense probably won’t be cut, but it would be harder to plus it up,” he said.
“This year was tough; next year will be tough. If there are across-the-board cuts, it will be even tougher.”
One defense and budget expert, Lawrence Korb, however, said cuts were highly unlikely to hurt Israel as they were due to be targeted primarily at reducing the number of US ground troops. In addition Korb, a former assistant secretary of defense, whose duties included administering about 70 percent of the Pentagon budget, pointed out that US President Barack Obama had already announced major defense cuts this spring, along the lines hinted at in the debt-ceiling deal.
Korb argued the country could withstand that reduction because of ending commitments in Iraq and Afghanistan and a current defense budget that was greater than at any time since World War II, controlling for inflation.
“The budget’s pretty high, so this won’t have any impact on our ability to use military force or protect our allies,” he said.
But John Bolton, US ambassador to the UN under the George W. Bush administration, warned about the dire effects of the potential scope of cuts.
He assessed that upwards of 50% of the automatic across-the-board reductions could come from defense if the bipartisan committee doesn’t achieve its obligation to make adequate, pin-pointed cuts.
“There is no strategic rationale whatsoever for cuts of this magnitude,” he maintained. “Defense spending is not just another wasteful government program. Subjecting it to potentially massive, debilitating cuts is rolling the dice in perilous times internationally.”
In addition to the potential cuts to defense and foreign aid, there’s the overall issue of how this recent crisis has affected America’s standing, and the impact it has elsewhere.
The US economy serves as the bedrock for the rest of the global economy, and on top of the economic crisis of recent years, the political brinkmanship over the debt ceiling and the potential for default has rattled markets in new and different ways.
“There was a positive bias towards the United States of America, towards Treasury bills. That was the case historically,” IMF head Christine Lagarde told CNN Sunday. “And the current crisis is probably chipping into that very positive bias.”
The threat to Israel was underscored in a release put out by one of the leading credit-rating agencies last month, noting the close connection between the US and Israeli economy jeopardizes Israel’s standing.
“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 US Treasury debt obligations,” it announced.
“Bonds issued by the governments of Israel and Egypt that are guaranteed by the US government were also placed on review for possible downgrade.”
Even without such a downgrade, pending the debt-ceiling deal, confidence in US bonds could be shaken, and that could affect America’s image more broadly, according to Korb.
“The way we’ve handled this... undermines our capabilities,” he said.
“People say, ‘Why should we listen to you? You can’t even manage your own finances.’” Middle East expert Aaron David Miller, though, said that it was premature and perhaps impossible to predict or draw links between the debt-ceiling imbroglio and America’s impact in the Middle East – particularly when the US has already been sidelined by so many recent events there.
At the same time, he suggested that the recent fuss over the debt ceiling could be read positively because the emergence of a bipartisan effort that significantly reduces US debt paints a picture of America making progress on addressing a major liability.
In other words, he said, “because it will actually be good for the country.”