THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Saturday, November 11, 1995 TAG: 9511110533
SECTION: FRONT PAGE: A01 EDITION: FINAL
SOURCE: STAFF AND WIRE REPORT
LENGTH: Long : 146 lines
A partial government shutdown next week and the first financial default in U.S. history became more imminent Friday. Republican lawmakers defiantly sent President Clinton a budget measure he has promised to veto.
The bill would provide for a monthlong extension of the government's borrowing ability. Without it, many federal agencies would be forced to close, and confidence in the United States' financial stability could wane, forcing an increase in interest rates.
The House voted Friday, 219-185, for the borrowing extension and a $67 billion increase in the $4.9 trillion debt limit. A vote in the Senate is expected Monday.
The president immediately attacked it as ``deeply irresponsible'' because the measure contains a provision limiting the Treasury Department's authority to manage the country's finances. His spokesman said a veto was ``automatic.''
Clinton urged Republicans to approve interim spending and borrowing measures that he could sign, and not try to stage a longer-term debate over budget priorities under the threat of ``a government default or shutdown.''
But the speaker of the House, Newt Gingrich, and his Republican ally, Senate Majority Leader Bob Dole, said that wouldn't happen until the president was willing to negotiate a broader budget agreement.
Asked if he was calculating that Clinton is going to blink, Gingrich said, ``I'm making a calculation that we aren't.''
Republicans had hoped all year to use the expiration of government spending and borrowing authority to force Clinton into a broader agreement on a plan to balance the budget. But pushed by aggressive House freshmen, Republicans attached several provisions to interim spending and borrowing bills that made them irresistible targets for the Democrats.
One would raise the Medicare premiums; a second would curtail the rights of death-row inmates. A third would loosen government's ability to impose regulations on business. A fourth, calling for restrictions on lobbying by nonprofit organizations that receive federal funds, was deleted at the last minute by the House. A fifth, to eliminate the Commerce Department, was stripped out by the Senate in a vote Thursday night that underscored the differences between Republicans in the two houses.
Beyond that, the funding bill would force Clinton to accept less spending on environmental, education and other programs than he wants.
Clinton said he hoped he and Republicans could ``resolve these differences and . . . keep the government running in the interest of the American people.''
Said Gingrich: ``We want the president to sit down and negotiate.''
Administration officials already have begun drafting plans for a partial government shutdown when the current spending authority expires Monday night.
Social Security checks would go out, they said, but no new applications would be taken. VA hospitals and the air-traffic control system would remain in operation, but the Smithsonian museums and National Zoo in Washington would be padlocked.
Earlier this week, the federal government drew up contingency plans for furloughing some federal employees and scaling back activities to conserve cash. SPECULATION RANGES FROM FEAR TO CAUTIOUS OPTIMISM
While all the political wrangling was taking place in Washington, Standard & Poor's Corp. - arguably the world's most venerable credit rating agency and an authority whose words are carefully parsed by investors - sent a clear signal to financial markets that its credit arbiters deem the budget battle plenty serious.
The credit agency said that while it was maintaining its blue-chip triple-A rating on U.S. government bonds, it is ``increasingly concerned about the global financial market ramifications of the current U.S. budget impasse.''
This came the day after Federal Reserve Chairman Alan Greenspan dispatched a letter to Senate Banking Committee Chairman Alfonse D'Amato, R-N.Y., warning that a default could cause lasting damage to debt sales.
There are ``many avenues to an agreement on the budget'' without dragging the Treasury's borrowing authority into the dispute, said Greenspan, adding that ``the full faith and credit of the United States need not be part of the process.'' Greenspan has been largely silent on the debt ceiling issue since September.
Some bankers and money managers in Virginia took speculation of a government default in stride Friday and downplayed the chances of the Treasury not honoring its debts.
Based on activity in the credit markets in recent days, a default appeared unlikely, said Paul M. Montgomery, a Newport News money manager and bond-market analyst.
The federal government appears to have the cash flow to make its interest payments, said Alan Gayle, a senior vice president of Capitoline Investment Services, a subsidiary of Crestar Financial Corp., the Richmond-based bank.
``I don't think things will grind to a halt Monday or Tuesday,'' Gayle said. ``Most people in the financial markets believe this is 11th-hour brinksmanship.''
The most immediate problem for banks, brokerage firms and individuals who invest in Treasury securities could be the inability to buy new securities.
Because of the spending limits imposed on the federal government, the Treasury is likely to cancel auctions of new securities in coming weeks.
The Treasury postponed three auctions of securities this week and said it may have to postpone one scheduled for Monday. The Treasury is scheduled to sell $29.2 billion in three-month and six-month bills at Monday's auction.
U.S. bonds posted the biggest two-day decline in more than two weeks amid growing concern the government will default on its debt for the first time in history.
The benchmark 30-year Treasury bond fell about 5/8, or $6.25 per $1,000 bond, pushing its yield up 4 basis points to 6.33 percent. Two-year note yields climbed 3 basis points, to 5.51 percent. ANALYSTS WARN THAT DEFAULT COULD RAISE INTEREST RATES
Because Treasury securities have been considered safe from default, they have served as benchmarks for interest rates on many other securities and for certificates of deposit. And because of their safety, Treasury securities are routinely used as collateral for loans.
Bankers and money managers cautioned that a default could push up the rates for other debt securities and loans, including home loans and business loans.
``It could shake the confidence of the financial markets globally,'' said Douglas Bretz, managing director in the fixed-income department of securities brokerage firm Wheat First Butcher Singer Inc. in Richmond.
In turn, rising interest rates would reduce the value of those Treasury securities already outstanding.
``I don't think the Treasury will default because the repercussions are huge,'' Bretz said. MEMO: Staff writer Tom Shean contributed to this report.
ILLUSTRATION: [Color Photos]
President Clinton
Sen. Bob Dole
[Color Graphic]
Federal Debt Limit
HOUSE VOTE
A ``yes'' vote is a vote to approve the bill extending the
government's borrowing authority through Dec. 12.
Herbert H. Bateman, R-Va. Yes
Owen B. Pickett, D-Va. Did not vote
Robert C. Scott, D-Va. No
Norman Sisisky, D-Va. No
Eva Clayton, D-N.C. No
Walter Jones Jr., R-N.C. Yes
KEYWORDS: FEDERAL BUDGET U.S. CONGRESS
by CNB