“The US Is Staring Down A Technical Default” – Here Are The Five Debt Ceiling Scenarios

Thursday, August 3, 2017
By Paul Martin

by Tyler Durden
Aug 3, 2017

In a note released on Monday commenting on the looming US debt ceiling showdown and the growing threat of a government shutdown and technical default by the US, Compass Point analyst Isaac Boltansky said he is becoming increasingly concerned that fall deadlines for federal government funding and the debt ceiling will prove tougher than the market currently expects, resulting in “markets roiled heading into 4Q and Fed’s policy normalization trajectory facing complications.” He adds that the increasingly fragmented legislative landscape may be set to “transition from inaction to dysfunction”, citing such factors as:

Lawmakers return in Sept. with no clear strategy
GOP leaders will likely be forced to rely on sizable contingents of Democrats
Current spending caps for FY2018 are “despised” by both Democrats, Republicans, but for wholly different reasons
White House’s position remains unclear as Treasury Sec. Steven Mnuchin has repeatedly called for a clean debt ceiling increase, but over the weekend President Donald Trump and OMB Director Mick Mulvaney suggested putting legislative activity on hold until health care is addressed

As a result, Boltansky sees odds of govt shutdown as materially higher than the likelihood of reaching debt ceiling as core components of spending fight (including border wall funding) are “meaningfully more politically complicated” than raising debt ceiling; his base case is for the federal government to face a brief shutdown in early October.

While that may be a little extreme, the reality is that with Congress critically fragmented, and with increasingly more politicians chosing to ignore anything that comes out of the mouth of the president, a happy ending is by no means assured and, as Boltansky suggests, “market event” may be necessary to spur Congress into action, similar to the passage of the TARP bill.

For a more nuanced look we go to SocGen’s Stephen Gallagher which lays out the debt ceiling events over the next 2 motnh, as well as the 5 scenarios on how the debt ceiling drama, 2017 edition, will play out:

Debt limit divisions & decisions

The House is in recess until early September, but lawmakers will return with just 12 legislative calendar days in which to raise the debt limit or risk a technical default, . Unlike the 2011 and 2013 episodes, however, this time is indeed different, with Republicans in charge of Congress and the White House. Nevertheless, intraparty politics are still fraught with dangers. Here are some of the details of the debt limit, as well as the political dynamics involved in getting a deal done. In addition, we look at how politically-induced volatility could impact rates.

Debt limit background

The Rest…HERE

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