Time is running out for a debt ceiling deal
With 12 days to go to August 2nd before a potential U.S. debt default, tensions are high in Washington DC, in the financial community and across the nation.
With so many competing plans, proposals and legislation in the works, there is real concern that the deadline to raise America’s debt ceiling might not now be met in time to stave off default.
The Republican “cut, cap and balance” legislation passed in the House today by a 234-190 vote sends the plan to the Democratic-controlled Senate, where it has no chance of passing.
Now that charade is over, what’s left are the proposals by the Gang of Six in the Senate to cut the deficit by $3.7 trillion and the plan by Senator McConnell to allow President Obama to raise the ceiling on his own and hopefully, be blamed for it at election time.
The President has indicated his support for the plan offered by the Gang of Six and it is somewhat assured to pass in the Senate. However, there is no guarantee it will pass in the House, where there it faces Democratic anger at the depth of cuts in popular programs like Medicare, and Tea Party apoplexy at even the mention of increased taxes on the wealthiest and corporations.
Against this backdrop, the clock continues to tick. The White House had initially given July 22nd as the last day that agreement could be reached in time to avert default. Now, it has backed off that statement, given the certainty that agreement cannot be cobbled together in time.
In addition, President Obama has now indicated that he would be now be willing to sign a bill raising the credit ceiling by a small amount to gain a few days, as long as a larger deal is definitely agreed in principle and in the works.
Given the recent US credit rating downgrade by the Egan-Jones agency and increasingly strident warnings from Moody’s and S&P, any muddled solution may lead to quick downgrades by the major ratings agencies, especially if no credible deficit reduction plan is agreed.
This is now high theater, but high theater with the ability to send the U.S. into default and recession and possibly take the rest of the world with it, regardless of what Republican candidate Michelle Bachmann believes.
Our bet is still that agreement will be reached in time, but my thinking is also that a downgrade might now be inevitable from the major agencies, following the lead of the Egan-Jones agency.
This would be based on the difficulty the political leaders currently have, and will continue to have in forming consensus on important financial issues. It will also be based on the continuing red ink that shows no sign of slowing down. That certainly would be bad news for the U.S., but maybe necessary to for changes in the political machinery in DC.
Stay tuned.
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