Goldman: "Headed For A Short-Term Debt Limit Deal"

Tyler Durden's picture

Remember: what Goldman wants, Goldman gets. The only question is whether Jan Hatzius and Bill Dudley have had their talking point convergence meeting over a tasty lobster club sandwich at the Pound and Pence already today...

From Goldman's Jan Hatzius:

Headed For A Short-Term Debt Limit Deal?

 

Little progress was made over the weekend toward a debt limit agreement, but the remaining issues should not be that difficult to resolve. Lawmakers are aiming for an agreement by October 17, but whether that happens just before or just after that deadline, we expect the debt limit to be raised before there is a risk of missed payments.

 

1. The main sticking points are how to address sequestration and whether any other policy changes might be attached. The latest obstacle to a deal is the disagreement on what the spending level should be once the government reopens. The spending level on non-emergency "discretionary" activities through September 30 was $986bn. In attempts to avoid a shutdown in late September, the House and Senate both passed legislation to continue spending at that level. Over the weekend, this issue appeared to present a new challenge, as Republicans focused on $967bn (the level that would be in effect once the slightly deeper 2014 sequester cuts take hold) and Democrats focused on $1058bn (the level that would occur in 2014 without any of the cuts under sequestration). A secondary issue is that Republicans are likely to seek at least some small concession related to the Affordable Care Act (also known as "Obamacare"). At this stage, this has been narrowed down to a delay in the medical device tax, increased income verification for subsidies under the program, or elimination of program subsidies for Congress.

 

2. A two or three month deal might be the easiest to enact. As we recently noted, recent negotiations have ranged from an extension of six weeks to one year. If a longer-term agreement on the appropriate spending level cannot be reached, the path of least resistance may be to enact a shorter-term extension of spending authority and the debt limit lasting two or three months. This would allow congressional leaders to sidestep the sequestration issue in this round of talks, since the cuts do not take effect until around January 15, 2014. In the interim, Congress would then try to replace some of the cuts under sequestration with other sources of budgetary savings (i.e., from "mandatory" spending such as entitlement programs or revenues) spread over ten years. Given the amounts in dispute--the incremental cut that takes effect in January is $21bn in budget authority compared with the level that was in effect before the shutdown occurred--an agreement to change sequestration appears to us to be within the realm of the politically possible.

 

3. A deal in principle could be reached in the next few days, but going slightly past the October 17 deadline is entirely possible. An agreement in the Senate looks likely over the next few days. Procedural hurdles in the House and particularly the Senate often cause delays, but usually don't result in missed deadlines if a political agreement is in place. That said, if a bipartisan deal is reached in the Senate, getting the bill through the House would still be a tricky proposition and Republican leaders may not want to put such a bill to a vote until other options have been exhausted. Lawmakers have taken the October 17 deadline surprisingly seriously, probably because the media have focused on October 17 as the date at which a "default" could occur. This is inaccurate, but might help a deal to be reached sooner rather than later. On October 17, the Treasury becomes constrained by the debt limit and can no longer borrow. However, the Treasury expects to have $30bn in cash on that date, which it could still use to finance the difference between revenues for several more days, and perhaps longer. Given how much lawmakers have narrowed their differences, it is very difficult to imagine a stalemate lasting until Treasury's cash has been depleted and its ability to make payments is put at risk. That said, last week we believed it was possible that the final agreement might not be reached until slightly past October 17 and that still looks possible based on where things stand this morning.

Of course, Obama may not be happy with this outcome (to say the least), but with 2 days left, he doesn't have much if any choices left. And now, risk ramp. Just as expected.