9 Oct 2013
Flash: Game of chicken on the debt ceiling – Rabobank
FXstreet.com (London) - Research teams at Rabobank comment on the US debt ceiling deadline, 17th October.
Key Quotes:
“On October 17, lawmakers need to raise the debt ceiling, otherwise the government would not be able to meet all of its obligations soon afterwards”.
“We argue that we should think of the continuing resolution and the debt ceiling as a two stage game played by three parties: the Democrats, the Tea Party and the moderate Republicans”.
“The Republican establishment wants to play this two-stage game as follows: vote with the Tea Party against a clean continuing resolution, then play another game of chicken on the debt ceiling to extract concessions from the Democrats, and raise the debt ceiling to avoid a default. They know that the Democrats won’t give up Obamacare, that’s why Boehner is already talking about broader fiscal policy (spending cuts other than Obamacare) as part of a possible debt ceiling deal”.
“Our baseline scenario is that we see a short-term extension of the debt ceiling in the final hours before the October 17deadline, which should push the next debt ceiling deadline a number of months down the road. This will only be a temporary solution, as the ‘Grand Bargain’ that would lead to a structural solution of America’s long term fiscal problems with Social Security and health care costs seems far away at the moment”.
“However, if a deal is reached to raise the debt ceiling before the October 17 deadline, the US is less likely to get downgraded than in 2011. In fact, a few months ago, both S&P and Moody’s changed their negative outlook to stable, because of the improved budget deficit outlook and the resilience of the US economy to the fiscal cliff”.
Key Quotes:
“On October 17, lawmakers need to raise the debt ceiling, otherwise the government would not be able to meet all of its obligations soon afterwards”.
“We argue that we should think of the continuing resolution and the debt ceiling as a two stage game played by three parties: the Democrats, the Tea Party and the moderate Republicans”.
“The Republican establishment wants to play this two-stage game as follows: vote with the Tea Party against a clean continuing resolution, then play another game of chicken on the debt ceiling to extract concessions from the Democrats, and raise the debt ceiling to avoid a default. They know that the Democrats won’t give up Obamacare, that’s why Boehner is already talking about broader fiscal policy (spending cuts other than Obamacare) as part of a possible debt ceiling deal”.
“Our baseline scenario is that we see a short-term extension of the debt ceiling in the final hours before the October 17deadline, which should push the next debt ceiling deadline a number of months down the road. This will only be a temporary solution, as the ‘Grand Bargain’ that would lead to a structural solution of America’s long term fiscal problems with Social Security and health care costs seems far away at the moment”.
“However, if a deal is reached to raise the debt ceiling before the October 17 deadline, the US is less likely to get downgraded than in 2011. In fact, a few months ago, both S&P and Moody’s changed their negative outlook to stable, because of the improved budget deficit outlook and the resilience of the US economy to the fiscal cliff”.