sábado, 19 de enero de 2013

US debt ceiling debacle averted?

Friday saw House Republicans propose a deal that would lengthen the fuse on the debt ceiling debate. If President Obama accepts it, House Republicans would vote to raise the debt ceiling for three months provided that both chambers of Congress pass a budget during that period.

The US Government passed its debt ceiling on December 26. Thanks to the cash management techniques that businesspeople know so well, the Treasury doesn't expect to  run out of cash with which to pay the expenditures Congress has already approved until the end of February. If the debt ceiling isn't raised, the US Government would default. Raising the debt ceiling is a regular occurrence.

The last time the debt ceiling went down to the wire was in the summer of 2011. The consequence of that bitter battle was the loss of the Government's AAA credit rating and the reduction of its borrowing cost. Yes, you read that correctly: although economic theory says the interest rate the US Government paid to borrow should have risen, in fact, rates declined. Don't count on that happening again, though. The decline in borrowing cost had everything to do with the state of the world economy and the European crisis. It was NOT a vote of confidence in US politicians.

The "must agree to a budget" provision of the Republican proposal is aimed squarely at Senate Democrats. They've blocked putting a budget blueprint on the Senate floor for the past four years, never mind that it violates the 1974 Budget Control Act.

If the three-month extension deal is made, it should quiet the markets, at least until and unless it looks like Congress can’t agree on a budget and the three months are drawing to a close. 

A deal doesn't guarantee calm in the market. There are two other deadlines coming up. One is the automatic spending cuts which were to take effect at the beginning of January. The "fiscal cliff" deal just postponed them for two months. Another trigger is the continuing resolution to extend the federal government’s appropriations authority. If Congress doesn't pass it by March 27, the government can not spend on non-essential items. 

Any issue that casts doubt on the ability of US politicians to agree on a plan to address the deficit or, worse still, for the government to meet its financial obligations can upset markets.  

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