Stocks fell three quarters of one percent and long bonds sold off by half a percent as the US debt ceiling talks collapsed. From the FT:
Efforts to strike a deal in Congress to end the government shutdown and avert a default on US debt suffered a setback after Republicans in the House of Representatives failed to rally around their leaders’ plan to end the stand-off.
Ahead of Thursday’s debt default deadline, when America will not be able to borrow more money to pay all its bills, top House Republicans did not fully embrace a compromise that was being crafted in the Senate by lawmakers from both parties.
Instead, they presented their restive, conservative caucus with a fresh proposal that was immediately rejected by Democrats and the White House, and faced significant scepticism from rank-and-file Republicans.
This forced John Boehner, the Republican speaker, to emerge from a closed-door meeting with his party members without any concrete plan to solve the crisis.
“There are a lot of opinions about what direction to go – there have been no decisions about what exactly we will do but we’re going to continue to work with our members on both sides of the aisle,” Mr Boehner told reporters.
Negotiations in the Senate between Republicans and Democrats – which were close to being finalised on Monday – were put on hold until House Republicans settled on their own position.
Mr Boehner was either expected to modify his own plan to make it more palatable to the right flank of his party, and hope to pass it with a Republican-only majority, or to concede defeat and accept a bipartisan plan that could pass with Democratic votes.
The upshot is blowing the first October 17 deadline on which Goldman has more:
Competing Debt Limit Plans Are Similar But Might Delay Enactment
BOTTOM LINE: The House and Senate now have competing debt limit increases, which both extend the debt limit to February 2014 and reopen the government through January 2014, but differ on details. The differences are not enough to block enactment of a debt limit increase, but could delay enactment past October 17 given the procedural timelines in each chamber of Congress. That said, the fact that the proposals are so similar implies that a final agreement is close at hand.
1. The Senate had nearly reached agreement on the debt limit… The agreement had not been formally released but Senate leaders had been in the final stages of working out a deal that would reopen the government through January 15, 2014, at the same spending level in effect prior to the shutdown, and would extend the debt limit through mid-February. It includes minor technical changes to the Affordable Care Act (“Obamacare”) and would establish a formal conference committee on the budget between the House and Senate to work out a broader fiscal agreement ahead of the next deadline. This negotiation would be expected to focus on replacing some of the cuts under sequestration–the next round of cuts takes effect January 15, 2014–with the budgetary effects offset with savings from other areas of the budget, spread over ten years.
2. …But the House may attempt to pass its own deal. House Republicans may put forward their own version of the debt limit bill instead. Theirs would take the basic components of the Senate’s bill but would add a two-year delay of the medical device tax and a cancellation of subsidies under Obamacare for members of Congress. These provisions appear to be aimed at ensuring adequate Republican support in the House while still having a possibility of being adopted in the Senate (with these items, the House plan will now look broadly similar to the bipartisan plan discussed in the Senate over the weekend). There is still some uncertainty as to whether there will be adequate support in the Senate, or even the House, for this bill, however; House Democrats seems inclined to oppose the bill, as does the White House, and it is unclear whether there is enough support among House Republicans alone to reach a simple majority of 217 votes.
3. A deal could still be enacted by October 17, but there are reasons to think it could go a little longer. First, although Congress has taken the October 17 deadline surprisingly seriously, the Treasury will still have funds after that date, and Congress knows this. Second, if the House amends the Senate bill or passes its own instead, this will delay enactment. Third, the Senate could present a procedural obstacle if even one member objects, since consideration can take as long as five days in that chamber. Fourth, if the House is eventually forced to take the Senate plan for a lack of viable alternative, Republican leaders are unlikely to want to hold that vote until the deadline, if not later. There is still a chance Congress will manage to get the debt limit raised by October 17, but a resolution later this week or even this coming weekend also appears possible.
4. Congress needs to raise the debt limit by October 17 to avoid disruptions, but missing the deadline by a few days would probably be manageable. The Treasury will lose its ability to borrow on October 17 and will have to rely on its cash balance. The Treasury market has already seen disruptions from the debt limit debate, and going past the October 17 deadline is likely to exacerbate those and could deal another blow to confidence. That said, the practical implications of going past October 17 are manageable. Treasury settles several auctions on October 17. $87bn in 3-month, 6-month, and 12-month bills have already been announced. It downsized its auction of 4-week bills, announced this morning, to $20bn from $30bn last week. With $120bn in bills maturing October 17, this will result in a greater-than-expected pay down of $13bn in debt. As of October 10 (the most recent data available) the Treasury had a cash balance of $36bn. The Treasury has projected that it will have a $30bn cash balance as of October 17, though this morning’s announcement might reduce that somewhat. At this point we estimate that the Treasury should have at least a $10bn cash balance through late next week. That said, given the volatility in the Treasury’s daily cash flows, as the Treasury’s cash balance dwindles the risk of a failure to make scheduled payments increases.
The AFR is reporting that Citi has now liquidated its short-dated Treasury portfolio:
It is not a good look for the United States that one of its big iconic banks is pricing in the possibility of interest payments being skipped or paid late by the US government.
Citigroup revealed on Tuesday it had liquidated US Treasury bills falling due around the end of this month and was also reducing its exposure to government bonds expiring through to mid-December.
Given what happened in 2011, and how vexed these negotiations are, one wonders if the next shoe to drop won’t be a stripping of the US’ credit rating.
