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Analysis: Why a Short-Term Debt Deal is Mostly Bad News for Defense Sector

Oct. 10, 2013 - 03:45AM   |  
By JOHN T. BENNETT   |   Comments
C-130J Super Hercules are assembled at Lockheed Martin's facility in Marietta, Ga. A proposed temporary US debt-ceiling increase would do little to give defense-sector firms relief from budgetary pressures.
C-130J Super Hercules are assembled at Lockheed Martin's facility in Marietta, Ga. A proposed temporary US debt-ceiling increase would do little to give defense-sector firms relief from budgetary pressures. ()
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WASHINGTON — Hopes are rising on Capitol Hill for a deal that would avert a US debt default. But the emerging deal is mostly bad news for the US defense sector.

With the default clock now under one week, senior House Republicans are pitching only a temporary debt-ceiling deal. The GOP proposal would raise the debt ceiling for six weeks, which financial experts and economists say would avoid a devastating American debt default.

But it would do little to give the Pentagon and US defense firms any relief from budgetary pressures with which they have been wrestling for months — and new budgetary spending clouds looming on the horizon.

That’s means a temporary debt-ceiling deal is mostly bad news for the defense sector. Here’s why:

Bad news: Sequestration would go untouched. House Republicans leaders made clear Thursday that the debt-ceiling increase they will present to President Barack Obama would only deal with that issue.

“We’re hopeful that this is the beginning of a meaningful dialogue with the president about the important issues that face this country,” House GOP Conference Chairwoman Cathy McMorris-Rodgers of Washington told reporters Tuesday. “We are hopeful that these will be good-faith negotiations over the long-term ... drivers of our debt, over our security that we need for this country as well as the pressing need to open up this government again.”

Republicans cast their debt proposal as only the beginning of what promises to be the latest effort to finally strike that oh-so-difficult-to-find “grand bargain.”

“That’s why we’re going to offer legislation that will offer a temporary increase in the debt ceiling to allow us some time to continue this conversation,” the House’s No. 4 Republican said. because it is time for solutions.

That means sequestration would not be addressed in this temporary bill. The next round of defense sequester cuts are slated to kick in on Jan. 15, meaning lawmakers will be cutting it close as they seek the elusive “grand bargain” in December — especially if they again kick the can down the road by a few weeks.

Bad news: Conservatives are hungry for more cuts. A six-week delay — or whatever the length in a final debt-ceiling bill — would give congressional Republicans and Democrats, as well as Obama administration officials, more time to seek a longer-term borrowing limit and deficit-cutting accord. But it also will allow fiscal conservatives in both chambers to salivate over federal spending cuts that go beyond the 2011-set sequestration reductions.

Sen. Bob Corker, R-Tenn., a member of the Senate GOP group that was in talks with the White House until late August, told reporters this week he and other fiscal conservatives want to lock in the sequester rates — and add to them.

The same is true for House GOP deficit hawks.

“I’m not going to sign off on [a debt deal] that doesn’t address the deficit,” House Republican Deputy Whip Tom Cole of Oklahoma said following a closed-door GOP caucus meeting. “That’s a pretty uniform Republican position. It doesn’t have to have everything we want.

“We can talk about sequester. Neither side likes the sequester cuts,” Cole said. “But those are going to stay in place until we come to a larger deal. Let’s start the negotiation.”

Bad news: The government would remain closed. While the Pentagon called back many of its civilian employees last weekend, uncertainty remains surrounding contractors. An end to the 10-day-old government shutdown would remove that uncertainty, and allow contracts on a range of things, including weapon programs, to get back to work.

Pentagon Comptroller Bob Hale told lawmakers on Thursday that Pentagon officials are “still trying to figure out” things like how to pay contractors.

Reopening all parts of the Defense Department and the federal government entities with which the defense sector does business likely will take a while.

“You know, the president is fond of saying that no one gets everything they want in a negotiation and, frankly, I agree with that,” House Speaker John Boehner, R-Ohio, said Thursday. “Nobody gets everything they want. … So what we want to do is to offer the president today the ability to move a temporary increase in the debt ceiling in agreement to go to conference on the budget [resolution for 2014], and for his willingness to sit down and discuss with us a way forward to reopen the government and to start to deal with America’s pressing problems.”

Good news: No deeper cuts. There are, however, several silver linings for the Pentagon and defense sector in another can-kicking deal between Republicans and the White House.

One is rather obvious: As bad as defense officials and industry executives say sequestration is, a six-week borrowing limit increase would not feature more cuts.

When the microphones are turned off, many congressional defense hawks acknowledge they are fearful of deeper Pentagon budget cuts. On the record, they are back to making the case against new cuts that would go deeper than sequestration’s $500 billion.

“The military chiefs told us they could take the $487 billion cut” set in motion by the Obama administration in 2009,” House Armed Services Committee Chairman Buck McKeon told Defense News. “But when you have sequestration on top of that, that just wipes us out. It just hollows out the military.

Good news: No market chaos. US and world stock markets have behaved, as our corporate cousins at USA Today put it, “nervously” to Washington’s flirtation with a debt default.

As hopes for even a short-term deal rose Thursday, US markets responded with an uptick.

That is good news for defense firms because, like other traded companies, if a default is avoided before Treasury Secretary Jack Lew’s Oct. 17 default date. Weapon makers would not have to deal with any chaotic market panic that might break out next week if America, for the first time, cannot pay its creditors.

-- Staff writer Rick Maze contributed to this report.

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