January 22, 1996 in Nation/World

Armey Says Gop Ready To Risk Default U.S. Credit Rating On Line In Fight Over Budget Cutbacks

New York Times

In the latest Republican effort to revive its stymied economic and social agendas, House Majority Leader Dick Armey said Sunday that Congress would refuse to extend the nation’s ability to borrow money to pay bills unless President Clinton accepts initiatives to decrease “the size and intrusiveness of government.”

The position outlined by Armey, R-Texas, a close ally of Speaker Newt Gingrich’s, signaled that the Republicans might use the threat of national default to force Clinton to give more ground.

Armey’s comments on NBC’s “Meet the Press” came a day before Congress returns to work.

The Texan’s position directly contradicts assurances given the past week by other Republican leaders - including Gingrich and Rep. John Kasich, chairman of the House Budget Committee - that a way would be found to make sure the government could pay its obligations, ranging from interest on the debt to Social Security to veterans benefits.

Gingrich could not be reached for comment on Armey’s statement. And it was not known what kind of conditions the speaker or Kasich or other Republican leaders might be willing to place on an increase in the debt limit.

But there are signs of sharp disagreement in Republican ranks, and Armey is known for having an accurate reading of where the most conservative members of Congress stand.

For Clinton, any delay or prolonged debate over raising the nation’s borrowing authority would have the same effect as no increase at all: It would force the Treasury Department to find new techniques -including some that the Clinton administration itself has said may be of uncertain legality - to raise cash to keep paying its bondholders.

Treasury Secretary Robert Rubin has said the country would run out of money around Feb. 15.

Rubin’s fear - and, in a way, his greatest weapon against the Republicans - is that the bond markets suddenly would conclude the threat of default is quite real. That likely would result in a surge in the interest rates that world markets charge the United States to borrow money, an increase that would ripple through the economy, sending home mortgage rates and other key interest rates higher.

Already, the nation’s two biggest credit-rating agencies, Moody’s and Standard & Poor’s, have warned that the United States’ “AAA” credit rating could be at risk.

Traditionally, U.S. Treasury securities have been regarded as the world’s least-risky investment, but that judgment and the cost of borrowing could change dramatically if investors conclude that gridlock in Washington could delay the government’s ability to pay them on time.

Rubin has made clear he has a plan in mind to evade the $4.9 trillion debt limit. But he has refused to discuss the details publicly, in part because lawyers for the Treasury and Justice departments still are working on a legal justification for such steps.

So Rubin’s challenge is simultaneously to reassure the markets and to scare the Republicans, convincing them they will be to blame for undermining America’s credit rating.

But the big question is how long Rubin can maintain this approach.

Rubin said through a spokesman that he did not want to respond to Armey on Sunday. But appearing on the same TV show, Leon E. Panetta, the White House chief of staff, said that it is “disturbing” that “the Republicans are going to hold the debt ceiling hostage to their agenda.”

Armey said Congress would not shut the government down again, as it did twice at the end of last year. Instead, he suggested that a “continuing resolution” would be passed to keep government operations running for 30 days or so, though with considerably less money for many agencies.

But he made it clear that, in his view, no effort to get a “clean debt limit increase” through Congress - that is, one with no conditions - would succeed.

For several months now, Rubin has stymied Republican efforts to use the debt limit as a weapon to force Clinton to accede to GOP budget proposals. He has accomplished that by “disinvesting” two government pension funds - in essence, selling the securities held in those funds and replacing them with IOUs to repay the principal and interest. The IOUs do not count against the debt limit.

Congress gave the treasury secretary that power in the 1980s when Democrats were using the debt limit to force action by President Reagan, and it guaranteed that any lost principal or interest would be restored by the government.

Despite that legislative guarantee, Republicans leaders have accused Rubin of “raiding” government pension funds, a term Armey used again Sunday. “Secretary Rubin has been extremely ingenious at how he’s been able to get into people’s retirement funds and grab up that money to keep the government running,” he said.

But Rubin now has used as much of those pension funds as he legally can. His other options - making use of other government funds, selling or leasing the government’s gold supplies and calling in more government deposits held in commercial banks or kept in foreign currencies - have substantial legal impediments.

By forcing Rubin to take extraordinary steps, the Republicans hope to make political gains. If they can convince the public that the treasury secretary is manipulating public funds, they could prompt a backlash against the Clinton administration.

The Republicans also could load up a debt limit increase with conditions they know Clinton would find unacceptable. If Clinton then vetoes that increase, Republican strategists figure, he would bear the blame for whatever financial chaos follows.

On Sunday, Armey said he would support linking the debt limit increase to a commitment to eliminate the Commerce Department, a periodic priority of the Republican Congress, and to prevent the treasury secretary from “ever again raiding the trust funds of federal workers’ retirement programs.”

In other words, to get a temporary debt increase, Clinton would have to agree to tie Rubin’s hands in the future. That is a deal the White House has said repeatedly it would not accept.

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