U.S. political leaders have made a deal on raising the debt ceiling. Now it will depend on whether those they lead will follow. Many will not, and the vote will now come down to the usual political positioning. The two parties will start counting votes and, when it is certain that the votes are there to pass it in Congress, the politicians that have the most to lose form being counted as a supporter will be “allowed” to vote no. The ultimate vote of support will be close but, unless the Republicans want to emasculate John Boehner and Mitch McConnell, they will support the compromise. And unless the Democrats want to cripple Barack Obama in the year before the election, they will back the deal as well.
Thus far, the markets are reacting as if the deal was certain—for the past couple of weeks there has been an assumption that a last-minute deal would shape up. That confidence was starting to shake a little last week, but even then the bond markets had remained pretty stable. But as the day wears on, that mood could shift.
The deal is as convoluted as one would expect after months of wrangling. At first glance it appears to be classic compromise. There is something for everyone in the deal, and something that will infuriate everyone as well. The basics are as follows. There will be an immediate $917 billion in cuts. This is far less than had been part of the deal in the past few weeks, when both parties had plans on the table that called for cuts of more than $3 trillion. This version has some specificity that the previous attempts lacked, however, and both sides have agreed on the cuts. The interesting part comes next when a further $1.5 trillion is cut at the recommendation of a congressional panel that will comprise select members of both parties. This is by far the most intriguing part of the deal, as it has the greatest chance of ultimate success. It reduces the impact of partisan debate, as most of the rest of Congress will be limited to pontificating on what they would like to see while the decisions will lie with only a few.
The debt ceiling is raised in two stages. The first takes place almost immediately and allows the government to fully honor its existing commitments. The next hike is contingent on the work of the commission or automatic cuts. There is also an opportunity in the table for Congress to vote on a balanced budget amendment, and that could play a role in all this. The House Republicans had been demanding that this amendment be considered and the Democrats had balked. The provision now is still pretty murky, but it looks as if an opportunity to consider such an amendment will be presented although there are no guarantees that it will be passed.
Source: Armada Corporate Intelligence