Debt limit crisis leaves corporations looking for answers
Published 10:55 am, Tuesday, August 2, 2011
Companies across the region are bracing for the impact from the federal government's efforts to raise the $14.3 trillion debt ceiling and implement trillions in spending cuts simultaneously.
The rancorous debate between Republicans and Democrats in Congress over competing proposals to lift the debt cap has seen the nation on the brink of defaulting on payments and in jeopardy of losing its AAA credit rating. The government's ability to borrow expires Tuesday.
The House on Monday passed a compromise agreement that would raise the debt limit by at least $2.1 trillion and reduce federal spending by $2.4 trillion.
One of those companies waiting to see how the votes will affect it is Norwalk-based Emcor Group Inc., a global provider of facilities services.
"We don't know how a full-scale change in D.C. will affect our business," said R. Kevin Matz, executive vice president, shared services, commenting that the company could benefit if the government seeks to cut costs and create efficiency through outsourcing work.
The government may want to start rationalizing spending, he said, but Emcor is agile and can refocus from government projects to the private sector.
But a resolution of the debt ceiling debate will eliminate some uncertainty, he said.
"Certainly an increase in the debt ceiling gives all markets future support for the U.S. standing behind its commitments," Matz said. "It has always seemed to us, through the process, that the alternative was unthinkable. Hopefully, with the debt ceiling behind us and some spending reductions agreed to by both parties, we will be on our way to balancing the budget."
Continued flux in the process could result in a loss of the nation's AAA credit rating, making it tougher to obtain a business loan, he said.
"Rising interest rates is not the right prescription for a weak economy with 9 percent unemployment," Matz said.
But the health of the U.S. economy, and its corporate base, remains in jeopardy as a result of the feuding in Congress, said Ridgefield-based economist Nick Perna, economic adviser to Waterbury-based Webster Bank.
"All hell would have broken loose if they hadn't approved raising the debt ceiling," Perna, who expects Congress will pass the compromise agreement, said prior to the vote. "I'm not going to congratulate anyone because it never should have gotten here. People pushing this are inept or insane or both," said Perna, an economics lecturer at Yale University.
A time-consuming, devisive debate over raising the national debt was precisely the wrong thing to do when the country is trying to avoid another recession, he said.
Calling the process a "reverse stimulus," Perna warned that if the federal government cuts back defense contracts as part of the effort to reduce national debt, it could impact defense subcontractors in Connecticut.
A drop in the nation's credit rating could occur, he said, causing a rise in interest rates, making it more expensive for businesses to borrow money and expand their operations.
There could be some benefit, Perna said, because a weakened dollar could make it easier for U.S. companies to sell their products and services overseas, and large multi-national companies like General Electric Co., which has operations in other countries, may benefit.
A spokesman for GE declined to comment on the debt ceiling issue.
But a spokeswoman for Stamford-based Pitney Bowes, the mailstream technology service provider with more than 30,000 employees, was upbeat, saying a reduction in government spending could force the government to be more innovative, creating opportunities for business.
"By engaging more broadly with the private sector, we see opportunities for government to become more nimble and flexible in delivering services, while reducing spending at the same time," Vicki O'Meara, executive vice president and president, Pitney Bowes Services Solutions, said in a statement. "If this is one outcome of the political struggle in recent weeks, it will be a solid win for the American people."
"With the slowing economy, we're taking more out of the economy. More money is being taken out of the public sector. We're embarking on an experiment. You have assume these cuts will be dumped on the cities and states," he said, adding that much more debate will occur when a 12-member House-Senate committee discusses how to make up to $1.5 trillion in cuts.
The crisis is having an international impact on our lenders, particularly China, which owns much of the U.S. debt and has been upset about the possibility of defaulting.
"I don't think the Chinese feel any differently than most Americans about this," Bruhl said.
With some foresight and a realization that the issue would be volatile, Congress should have started the review more than a year ago, with a line-by-line examination of spending and income to determine areas of agreement, said Mladen Kresic of K&R Negotiation Associates in Ridgefield.
"There is a noble goal. The short-term perception of a political win will come at the expense of a long-term win," he said, not surprised that the issue was not addressed sooner. "People don't act until the pressure is on. It's going to continue to be a political football."
The 12-person committee has an opportunity for progress because of its manageable size, Kresic said, hopeful that the additional time will allow the public to understand the situation better. "The first priority is to inform the American people."