Magazine article Insight on the News

Default Scare Didn't Faze Stock Market

Magazine article Insight on the News

Default Scare Didn't Faze Stock Market

Article excerpt

Remember those dire White House warnings about the economic upheaval that would befall the United States if the Republicans persisted in their plan to use the debt limit as a weapon in the battle of the budget?

Not only did predictions of debt default and disarray in the markets fail to materialize, the exact opposite occurred: The bond and stock markets are stronger than ever in the absence of a permanent debt-ceiling increase, and economists say the improved prospect of the GOP balanced-budget plan becoming law is a key factor in Wall Street's bull market.

For several weeks, the Clinton administration unleashed a volley of gloomy scenarios that warned of a catastrophe in the financial markets if the GOP persisted in its proposals to slow the growth in federal spending and use a short-term debt-ceiling increase to impose its will on President Clinton. (See Symposium, Nov. 6.)

"This legislation is not a debt-ceiling increase. It is a shortcut to default on the full faith and credit of the United States of America," Treasury Secretary Robert Rubin said about the GOP's temporary debt-limit extension bill on Nov. 9.

"Default is becoming increasingly likely," said White House spokesman Mike McCurry a few hours before the House voted 227-194 to raise the debt ceiling by $67 billion to allow borrowing to continue through Dec. 12.

The day before McCurry issued that ominous warning that the government might refuse to meet its interest payments, Treasury Undersecretary John Hawke complained that the House's action "would put the U.S. in imminent danger of default."

In the days leading up to the passage of the temporary spending and debt-limit extension bills, the White House kept up a drumbeat of such warnings. And some prominent figures in the financial markets joined in.

Leo C. O'Neill, president of Standard Poor's Ratings Group, one of the leading credit-rating agencies in the world, said the GOP's threat to withhold a debt-ceiling increase had damaged the United States' reputation as a country that always pays what it owes.

"Even if the issue is resolved in the 11th hour and 59th minute, in some respects the damage has been done," O'Neill said in a report whose warning echoed Rubin's line. But none of these bleak scenarios came to pass. The Dow Jones industrial average, perhaps the best measurement of the stock market, rose to record highs in the last two weeks of November, passing the 5,100 mark on Nov. 29.

"The bond market is stronger today than it was when Rubin's so-called budget crisis began," says Jack Albertine, an economist who advises major companies about the impact of Washington's economic policies. …

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