Debt ceiling dealing

Posted by Cardiff Garcia on Jun 28 19:49.

Politics isn’t exactly our strong suit, but we’ve believed for some time that the incentives for the two US political parties to arrive at a deal on the debt ceiling are skewed against reaching an agreement until the last few moments before the August 2 deadline.

In addition to the substantive disagreements over long-term spending cuts and tax hikes, the Republicans in particular seem keen not to be perceived by their tea party wing of having conceded too early and agreeing to a suboptimal deal.

But even assuming that a deal is reached before the deadline and also that any kind of markets freakout is avoided, there’s actually a decent chance that we’ll have to deal with the problem again sooner rather than later.

And “sooner” could well be the middle of the next election year.

Have a look at this helpful chart from a new SocGen note (thanks to Greg White for the pointer):

And a brief explainer:


We believe that the most likely outcome is for a small increase in the debt ceiling, less than $1trn, and that it would not be accompanied by any long-term deficit reduction plan. In our view, the probability of this event occurring is around 65%, with a 20% chance of it occurring before mid-July and a 45% chance of it occurring after.

Well. Given the expected borrowing needs of the US for the rest of this year and next…

… an increase in the debt ceiling of less than $1 trillion means the government will be covered only through the end of March 2012. This is SocGen’s base case scenario, and it’s also a concern that’s been floated to us by other strategists in the last few weeks.

Another debt ceiling debate assuming we get through the current impasse, but next time just as the 2012 presidential race is kicking into gear. Oh, joy.

(Full note, which includes a discussion of the possible outcomes, in the usual place.)

Related links:
The impossible debt ceiling rollover – FT Alphaville
Moody’s thinks about thinking about the US debt rating – FT Alphaville
The T-bill that broke America’s credit – FT Alphaville

This entry was posted by Cardiff Garcia on Tuesday, June 28th, 2011 at 19:49 and is filed under Capital markets. Tagged with , , .

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