BofAML Warns Hope For The Best; Prepare For The Worst
A plausible debt ceiling agreement is finally on the table, but BofAML doesn'tt expect a deal until next week or later.
Hope springs eternal
After a long period of inaction in Washington, politicians are finally coming out of their stupor. Yesterday, House Speaker John Boehner met with members of the House Republican Conference to propose a six-week extension of the debt ceiling. While the text of the legislation is not yet available as we go to print, the bill would reportedly suspend the debt ceiling until November 22 and prohibit the Treasury Department from using extraordinary measures to extend debt payments beyond that time. It also would create a process for budget negotiations between the two parties. Separately, the president is also in the process of meeting with groups from both the Senate and the House. While these meetings raise hopes of a quick deal — and caused a 2% jump in the stock market — we believe a deal is more likely next week (or later) than this week.
The devil’s in the details
As in past budget negotiations, there are usually a number of false starts before an actual deal is done. With these bills, the devil is always in the details. The president is unlikely to quickly agree to a short-term extension, in our view, and will likely instead hold out for a 6- or 12-month extension. He is also unlikely to support a bill that creates a new deadline and thereby by another potential brinkmanship moment.
A clean bill of health?
From the other side of the aisle, a relatively clean bill could violate not one, but two Republican rules:
- The Boehner Rule — any increase in the debt ceiling must be matched by an equal cut in spending over the next 10 years.
- The Hassert rule — the Speaker will not allow a vote on a bill unless a majority of the majority party supports it.
Comments by conservative leader Representative Steve Scalese (R-LA), suggest conservative resistance to the Boehner proposal. Thus the bill may split the Republicans and require heavy support from Democrats.
Why do now what you can put off until later?
The other challenge is that little seems to get done until the last minute in Washington these days. October 17 is a soft deadline: the Treasury will still have plenty of cash. As we note in this week’s Macro viewpoint, the real deadlines are later when cash runs out. This creates a risk of a long-delayed agreement. It also means a high risk of miscalculation where “last minute” suddenly becomes “too late” and the government defaults on a payment of some sort.
Extending the debt ceiling for a significant period of time would be an important step forward, removing the more important of the two shutdown threats. However, efforts to fund and reopen the government have been put on the back burner and could stay there until the debt ceiling is resolved.
Our motto: hope for the best; prepare for the worst.
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