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Pelosi Vows To Avert Shutdown As Dems Reportedly Cave To "Republican Blockade"

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by Tyler Durden
Thursday, Sep 23, 2021 - 06:40 PM

Yesterday, when we laid out the dynamics behind Biden's game of debt limit chicken, we quoted Rabobank which explained why the stand-off between Democrats and Republicans ahead of the debt ceiling Drop Dead Date (the date when all emergency funding measures are exhausted and which falls some time in late October) is so precarious: unlike previous occasions, neither side has to back down due to political or ideological purposes. In fact the side that is seen as conceding first  will likely be punished by its electorate; it's also why Goldman has repeatedly warned that the odds of a catastrophic outcome are especially high.

Worse, the closer we get to the Drop Dead Date without a deal, the more likely a freefall outcome becomes as the two sides dig in with the only hope then becoming a deal after the fact.

However, today a ray of hope emerged when Bloomberg reported that Nancy Pelosi signaled Democrats will avert a government shutdown by passing a stopgap spending bill without a debt ceiling increase in it, amid Republican opposition to linking the two measures.

“Whatever it is, we will have a CR that passes both houses by September 30," Pelosi said at a press briefing Thursday, referring to the continuing resolution that will be needed to fund the federal government at the start of the new fiscal year on Oct. 1.

The House passed a stopgap spending measure this week that would keep the government open until Dec. 3 and suspend the debt ceiling until Dec. 16, 2022, but that measure is dead in the Senate where it needs 60 votes to move ahead and Republicans are expected block it in.

At a news conference that included Treasury Secretary Janet Yellen and Senate Majority Leader Chuck Schumer, Pelosi said that the conversation on the debt limit would continue. Schumer separately announced that Democrats have a “framework” for a deal to pay for President Joe Biden’s economic plan, though neither he nor Pelosi provided any details.

Adding to the confusion, due to the irregularity of Treasury revenues and outlayws, it is not yet clear when the US Treasury could be on the brink of a default, adding uncertainty to how quickly Congress has to act. Yellen has said the government will probably exhaust its ability to avoid breaching the limit at some point in October, which is in line with Goldman's estimate of D-Date falling around October 27.

Meanwhile, confirming that Senate republicans won't touch the debt limit vote, top senate republican Mitch McConnell said Democrats have plenty of time to use a partisan approach to raise the debt ceiling without Republican votes.  He also said that it would take Democrats “about a week or a little more” to use the budget reconciliation procedure to raise the debt limit (reconciliation bills bypass the filibuster, removing the need for GOP votes in the 50-50 Senate, but have required procedures that take time to go through).

Senate Democrats have so far resisted deploying that tactic, saying that the effort should be bipartisan as Democrats realize that raising the debt ceiling on their own could hurt the Democrats in the midterm elections in 2022, so they prefer sharing the blame with the Republicans by forcing them to support a suspension of the debt limit. In .

“This may inconvenient for them, but it is totally possible,” McConnell said. “This Democratic government must not manufacture an avoidable crisis.”

For once he was actually right: as Rabobank explained, "the Democrats have the power to raise the debt ceiling and adopt a spending patch, through budget reconciliation, without any Republican vote. Therefore it will be difficult to blame a government shutdown or even a default on the Republicans. The mainstream media may try to do so anyway, but conservative media – which are relevant to Republican voters – will explain the realities to their audience. Therefore, there is no electoral need for the Republicans to blink. If they have the stomach for it, they can win this game and force the Democrats to “own” their spending spree. What’s more, if the Democrats fail to stick together under pressure, Biden’s ambitious legislative agenda could dissolve in October."

McConnell’s comments challenge House Budget Committee Chairman John Yarmuth, who said Wednesday that Democrats probably do not have enough time to raise the U.S. debt ceiling on their own using the fast-track budget process before the default date. Actually they do - here is a calendar of fiscal policy deadlines courtesy of Rabo:

An impartial budget expert agreed with McConnell’s view of the timetable: “They could do it in less than two weeks,” said former Senate Budget Committee staff director Bill Hoagland, now with the Bipartisan Policy Center. “It would be tight but I believe they could do it.”

To be sure, not all Democrats are opposed to using the partisan path to raising the debt limit. House Ways and Means Committee Chairman Richard Neal said in an interview with CNN he’d be open to using reconciliation.

“If we had to do it, I would do that,” Neal said, according to CNN. “I mean that the idea that America would default on debt is so far removed from everything I’ve ever entertained or thought of since I’ve been here.”

Other Democrats on Thursday suggested the same: “I don’t draw lines in the sand. I want to get this done,” Maryland Senator Benjamin Cardin said.

Virginia Senator Tim Kaine said Democratic leadership is exploring alternatives for the debt limit. “I’m not going to let the government default,” Kaine said, adding that Democrats have voted under Republican presidents to suspend the debt ceiling. “But if they’re not going to be responsible, we still will be,” he added.

Senator Richard Shelby of Alabama, the top Republican on the Appropriations Committee, said he expects “at the end of the day” the Senate will pass a stopgap government funding bill that doesn’t have a debt limit increase on it and that Democrats will move the debt-limit increase through reconciliation.

Yet not everyone is confident that a debt ceiling deal will be reached on time, starting first and foremost with the market, where today's 4-week and 8-week Bill auctions showed a dramatic preference for the latter at the expense of the former, which mature right around the Drop Dead Date and may suffer repayment complications if the US is in technical default. As shown below, the discount rate on the 4-Week Bills came 1.5bps higher than the 8-Week Bill, the widest differential since the March 2020 covid crisis.

Additionally, there was a collapse in Indirect demand for 4-week bills, with Indirects taking down just 21.3% while taking home a much higher 67.3% of the eight-week offering, the most since June 17.

Finally, one reason why Pelosi may be less than credible is because earlier today, WaPo reported that the White House budget office (OMB) told federal agencies on Thursday to begin preparations for the first shutdown of the U.S. government since the pandemic began.

While administration officials stressed the request is in line with traditional procedures seven days ahead of a shutdown and not a commentary on the likelihood of a congressional deal, the market did not seem to accept that explanation. Both Democrats and Republicans have made clear they intend to fund the government before its funding expires on Sept. 30, but time is running out and lawmakers are aiming to resolve an enormous set of tasks to in a matter of weeks.

More importantly, WaPo confirmed Bloomberg's report reporting that privately Democrats also began to acknowledge they are unlikely to prevail in the face of what the Washington Post called, a Republican blockade: "Democrats have started discussing the mechanics of how to sidestep Republicans as soon as next week, according to lawmakers and aides, as they maintain they will not allow the government to shut down in a pandemic or the country to default for the first time in history."

In a sign of the early scramble to avoid a shutdown, the Senate’s two top appropriators — Chairman Patrick J. Leahy (D-Vt.) and top Republican Richard C. Shelby (Ala.) — are set to huddle at a meeting later Thursday to discuss issues potentially including a short-term agreement to keep the government funded. Such a measure could be moved independently of an increase in the debt ceiling, since Republicans including McConnell have an expressed an openness to supporting such a solution.

Meanwhile Bill Hoagland, a senior vice president at the Bipartisan Policy Center and former Republican staff director for the Senate Budget Committee, pointed out that parts of the Centers for Disease Control and Prevention and the National Institutes of Health would be closed as part of the government shutdown. Hoagland said a very brief shutdown may occur but said he doubted it would go on for “any length of time.”

“This would be the first shutdown during a declaration of national emergency,” Hoagland said. “In the midst of an ongoing pandemic and non-resolved issues related to the delta virus, to have a shutdown of some of the major federal agencies would add unbelievable complications to our ability to recover.”

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