Goldman's Take: "Clear Possibility That Final Resolution Might Not Be Reached Until Shortly After October 17"
Confused by what is going on in Washington? That's ok - everyone in Congress also is. So here is some much needed clarity from the puppetmaster himself: Goldman Sachs.
From Goldman's Alec Phillips
Visibility on Debt Ceiling Increases But Resolution Unlikely Before Next Week
The debt limit deadline looks increasingly likely to be pushed off with a short-term extension. It looks less likely that the partial federal shutdown will be ended with the extension, but this is still unclear. There is still some uncertainty on the path to resolution over the next week, but the fact that both parties have accepted the notion of a "clean" extension reduces the risk of the Treasury's missing scheduled payments due to the debt limit.
1. Visibility on the path forward on the debt ceiling has increased. We noted in last week's US Economics Analyst that a short-term extension was becoming more likely as the political focus shifted to broader fiscal discussions that would take additional time to resolve. This now appears to be the most likely scenario. The probability of a short-term extension appears high, since most of the parties involved, including the White House and House Republicans, seem willing to accept or at least have not explicitly rejected a short-term approach as a means to avoid next week's deadline.
2. While visibility has increased, there is still some uncertainty regarding the path forward. (1) A short-term extension is the preference of Republicans, not Democrats. That said, neither the White House nor most congressional Democrats have said explicitly they would block a "clean" short term extension. (2) It isn't clear whether at some point during the process Republicans will seek other policy changes; as we understand the House bill, it does not seek any other policy concessions but may establish a House-Senate conference committee on budget negotiations. Depending on the details, this could prove to be a sticking point. (3) Democratic support will be needed to pass the bill in the Senate and probably in the House, and it is not clear whether Democrats will support a debt-limit extension that does not include a reopening of the government. While Democrats would prefer to resolve both issues together, after taking the position that no conditions can be tied to a debt limit extension, it may be difficult for them to reject an extension solely on the grounds that it does not also reopen the government.
3. The House looks likely to take up a bill to suspend the debt ceiling for six weeks. This looks similar to what was passed earlier this year. The bill would suspend the debt limit until November 22. However, as we understand it, unlike the last extension, the House bill would specify that the "extraordinary measures" used to create additional headroom under the debt limit could not be replenished. This would mean that as of November 22, the situation would reset to roughly the same financing situation the Treasury would have faced on the current deadline of October 17, when the Treasury expects to be constrained by the debt limit and could rely only a projected $30bn cash balance to make payments.
4. The shutdown looks less likely to end soon. We noted last week that there was a 30% chance the shutdown would not end when the debt limit was extended, and following the Department of Defense's decision to bring back most employees we noted that the announcement increased this probability. It appears to have risen further now that the House plan excludes a "continuing resolution" to fund government operations. This implies that the shutdown could last for a while longer, though this will remain uncertain until the final version of the debt limit extension is actually agreed upon over the next week or so.
5. No final resolution seems likely before next week. Congress had been scheduled to leave for a weeklong recess after October 11, but this has been canceled. The House may vote on its short-term debt limit plan later today or tomorrow. Republicans hold 232 seats and 217 votes needed for a majority, so Republicans can lose only 15 votes from their own party and the vote tonight or tomorrow could be very close unless Democrats support the measure. The Senate is likely to vote on Saturday a different plan offered by Senate Majority Leader Reid (D) to suspend the debt limit through 2014. That procedural vote would require 60 affirmative votes to clear, meaning at least 6 Republicans would need to support it. If the House bill passes today or tomorrow, the Senate bill to extend the debt limit for one year looks unlikely to clear the 60-vote threshold necessary. If the House bill fails, however, the Senate approach could gain momentum. If the Senate's one-year extension fails and the Senate takes up the House bill, the key question will be whether the Senate adds a "continuing resolution" to reopen the government. If this is added, the House would then have to vote once again on the modified version, but would presumably have to rely on more Democratic votes and less Republican votes than when the 6-week extension comes up for a vote in the House tonight or tomorrow. In our view, the developments over the last day reduce the probability of "tail risk" scenarios that would result from going far past the deadline, but there is still a good chance that Congress will run up to the deadline before reaching a final resolution and there is a clear possibility that final resolution might not be reached until shortly after October 17.
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