A Debt Ceiling Deal Still Isn’t Imminent
Author: Greg Valliere
May 22, 2023
IF THE X-DATE IS REALLY JUNE 1, we’re in trouble because there simply may not be enough time to write deal into legislative language, then give lawmakers time to actually read it. If the X-date is around June 6 or 7, there may be time to reach an agreement.
A BAD WEEKEND: Both sides seemed far apart on specific issues after the inconclusive weekend; incredibly, some new issues were raised — Republicans want to toughen previous provisions on work rules for people to get eligibility for federal welfare, while the Democrats want to add tax increases, and they don’t want defense spending hikes.
EVEN WHERE THERE’S AN AGREEMENT IN PRINCIPLE, there’s no deal on specifics on issues such as how long spending caps should last. Further complicating the debate is growing dissension among Democrats who are
increasingly opposed to deep spending cuts. And they are becoming more vocal about raising some corporate taxes.
YET BOTH SIDES COTINUE TO ASSERT that they’re making progress — but it’s glacial, and a default is still possible. Failure to reach a deal this week — a specific deal, not an agreement in principle — could begin to have a serious impact on the stock and fixed income markets.
PLANNING FOR THE WORST: Treasury Secretary Janet Yellen was candid yesterday; she conceded that she’s looking at which programs will get funded and which ones will not if there’s default. She wasn’t specific, but it appears that fixed income payments would be made, along with Social Security and veterans’ benefits. But government contractors might have to wait until later this summer to get paid.
BOTTOM LINE: We think there could be signs of modest progress tonight, but not a deal. Further meetings are likely every day this week. But angry Democrats are prepared to challenge Biden, and angry Republicans are prepared to challenge McCarthy. A revolt in either — or both — parties is possible.
THE THREAT OF A DEFAULT IS SO UNTHIKABLE that an extension — kicking the can down the road — is still a likely fall-back, and using the 14th amendment to the Constitution is possible. Will there be a default? Unlikely. Will this require an extension of least several days or longer? Quite possibly, because there’s no agreement on most of the key provisions.
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