Debt ceiling update: What Wall Street thinks is happening

July 22, 2011

One reason financial markets have been relatively sanguine about the debt ceiling negotiations is that investors have been almost certain that something gets done by August 2. Here is what one bank lobbyist told me today:

1-1.5T in spending cuts and an equal 1-1.5T on debt ceiling lift (a short term reprieve) — with the next 120 days battling over the Grand spending/revenue Deal (that uses Bowles/Simpson – Gang of 6 as the starting point).

And this is what BankofAmericaMerrillLynch is saying:

We expect a deal to come in two stages: a smaller up-front deal of possibly $50-100bn per year in deficit reductions (relative to the President’s initial budget offered in February 2011) over the next decade, combined with a more comprehensive deal to be passed either at the end of the year or early next year. The comprehensive deal would include both tax and entitlement reform and cuts to discretionary spending. However, our concern is that policymakers struggle to come up with a credible longer-term plan before year-end, particularly since it is an election year. This would mean we could face the risk of another debt ceiling crisis and ultimately rating agency downgrades.

With this plan, we believe the debt ceiling will be raised before August 2nd, but probably by only $500bn to give Congress six months time to write and pass the new legislation. Any agreement to raise the debt ceiling by a much larger amount in the future would likely be conditioned upon passage of the more comprehensive legislation.

We expect the US credit rating to remain on negative outlook and for a downgrade to AA to occur only when the rating agencies believe there will be no serious follow through. This means a downgrade would not likely occur until after the six month period of negotiations which puts us in early next year. Following any federal downgrade, we would expect downgrades of insurance companies, government related enterprises and state governments that depend heavily on federal funding. S&P has taken a more aggressive stance then the others, and may downgrade to AA+ as early as August if there remain significant risks to implementing a $4 trillion longer term fiscal plan.

Also, my pal Phil Klein had this takeaway from his chat with House Speaker Boehner today:

I asked Boehner whether some sort of short-term agreement would be necessary given that they’re closing in on the Aug. 2 deadline, and even if a late deal were struck, it would have to be written, scored by the Congressional Budget Office, and passed by the House and Senate.

“It is not what the goal here is,” Boehner responded. “As I said, there are two challenges here that we have to overcome. We have to raise the debt ceiling, and we have to have a serious down payment on reducing our budget deficit and our debt.”

Saying it isn’t the goal is different than saying it isn’t going to happen. Some sort of short-term extension seems inevitable, if nothing else but to give them time to do all the procedural things if they’re close to a bigger deal. There’s nothing ideologically preventing either side from this, and as I’ve noted, both chambers have already voted for deficit spending through Sept. 30, so there’s an easy argument for extending it at leas through then.

Read more at the Washington Examiner.

 

2 comments

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? On Monday we have 8 days to Aug 2 deadline.
Supposing an emergency bill gets through the problematic house by Wed or Thurs (seems unlikely)
Isn’t it true that by Senate rules, just ONE Senator can delay a bill coming to vote by Tuesday, and that MANY Senators are BOTH sides dogmatic, uncompromising, and angry…? regarding whether the rich should pay more tax or not?
It appears to me that both sides are using the crisis to push their agenda and too many believe the opposite party will be the one that will be blamed if there is a default.
Looks real bad.

Posted by peterfairley | Report as abusive

The British minister was correct in stating that “right-wing nutters” in the House of Representatives are responsible for the position we find ourselves in as tea-party Republicans are trying to implement their far right-wing agenda by holding the American economy, and working American men and women, hostage with actions that could seriously damage the economy and the middle class and poor. To those of you who voted for these nuts, I hope you’re satisfied with what you got because the bottom line is the actions of these fools will hurt you too unless you happen to be part of the 2% that hold most of our country’s wealth. To the rest of you, I ask that you consider the proposition that there needs to be a redistribution of wealth in this country by making the wealthy pay their fair share of taxes. We cannot keep going the way we’re going or we’ll end up an extremely polarized country wherein 98% of the citizens live at a third-world level and 2% live a life of unimaginable luxury. This country will then become completely dysfunctional as we’re close to being right now, and there will be violence as the 98% take wealth from the rich whether they like it or not. Don’t think it can’t happen because it has happened many times throughout history. And, it will soon happen in this country, if Republicans continue their nonsense.

Posted by caliguy55 | Report as abusive