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Doomsday for US debt, Congress has no plans

As the US nears its first default, no political party in Washington has yet indicated it is ready to back down from a partisan showing over federal debt limits.

Senate Democratic Leader Chuck Schumer plans another vote early Monday on a measure passed by the House to suspend the federal government’s legal debt limit until December 2022. But his Republican counterpart Mitch McConnell vowed to block the attempt to run for a third time. .

There is a growing risk that political miscalculations and Congress’ Byzantine processes could lead America to an outcome that practically no one on Wall Street or Washington expected. President Joe Biden plans to speak Monday on the need for Congress to address the debt limit.

“The general consensus[of the customers we talk to]is that this will not happen,” analysts at Barclays Plc, including Sean Gollhar, head of public policy research, wrote in a note. “But political disputes in Congress are stronger than ever and the battle lines are more rigid.”

The list of uncertainties includes:

*Unless the debt limit is lifted or suspended, the exact date the Treasury Department will run out of cash; Secretary Janet Yellen has said around October 18 but other observers see a week or two more.

* How seriously Democrats refuse to use the complicated budgetary process that Republicans want to force them to use to raise limits

*Date when there is insufficient time left for Democrats to use that budgetary process to prevent default

“The concerns have already begun, to be quite honest,” said Gennady Goldberg, senior US interest rates strategist at TD Securities. Without a clear legislative route by the end of this week, “I think the market will be very worried,” he said.

QuickTake: What is the debt limit and will the US raise it?

Morgan Stanley analysts predict Treasury bills maturing in late October could “quickly” decline in value unless a solution is in place by next week, they wrote in a note to clients late last week. . On Friday, Treasury bills sold out around a potential default window, with the yield at maturity of October 21 climbing up to 8 basis points.

Even without the default, in 2011 the debt-limit overrun between the Republican and Obama administrations provoked the first downgrade in the US sovereign credit rating and contributed to the stock-market slide.

Balancing the threat Leaders of both the parties have assured that they do not want default. And, each party has a failsafe vault available at any time. Only 10 Republican senators can join forces with Democrats to end a filibuster of debt-limit legislation. Or all 50 Senate Democrats could unite to carve out an exception to the filibuster rule, so that the measure can be passed by a simple majority.

According to William Hoagland and Steven Bell, former Republican staff directors on the Senate Budget Committee, it will take about two weeks to raise the debt limit through the “conciliation” budget process. It suggests that Monday, October 4, is the last day to comfortably follow the alternative process – if Yellen’s October 18 date proves binding.

However, Yellen suggested in testimony to a House committee on Thursday that the government may have “a few days” of extra cash left after the set deadline. The Congressional Budget Office last week estimated the default date for late October or early November. Morgan Stanley introduced October 28 as a possible default date in its analysis on Thursday.

fiscal flow chart

The economic impact of the pandemic and the flow of money from there coronavirus Relief Package Congress has overcome the difficulty of accurately predicting the day-to-day flow of government revenue and payments, which is difficult under any circumstances.

The US Capitol as seen on Tuesday, December 29, 2020 in Washington. (AP)

The timeline for the cumbersome conciliation process to follow is also not certain, as it is usually positioned for a budget process that lasts for months and involves multiple steps by both the House and Senate. While this provides an opportunity to bypass a Senate filibuster, it includes time for debate and unlimited “vote-a-ram” in which senators can offer unquestioned amendments to a budget proposal.

“We’ve never used this process like this before,” said Hoagland, who was involved in 18 of the 21 reconciliation resolutions passed by Congress as a Senate aide and is now a senior vice president at the Bipartisan Policy Center.

Schumer and House Speaker Nancy Pelosi both said last week that reconciliation is a “nonstarter” because it could take too long. Senator Dick Durbin, the No. 2 Democratic leader on Illinois, told reporters that Schumer went through the process for other Democrats behind closed doors and said it involved “three or four weeks of activity in the House and Senate,” Recognizing that GOP lawmakers make extensive use of opportunities for delay.

‘clumsy effort’

Bell, who has been managing or analyzing the annual budget since the establishment of the reconciliation process in 1981, said he was confident it could be done in two weeks, if Senator Schumer served in the Senate seven days a week. .

McConnell may also cooperate to reduce that deadline to “a few days,” though not by much, until all 50 Republican senators agree, Bell said.

McConnell has made clear that he does not intend to back down from his demand that Democrats tolerate the time-consuming process.

“Clumsy efforts in a partisan jam don’t work,” he said Thursday on the Senate floor. “What works when the majority accepts the reality of the situation.”

Complications of the Holiday

Despite opposing the 2017 Republican tax cuts, Democrats voted with Republicans three times to raise or suspend the debt limit to avoid default during Donald Trump’s presidency.

While the default date is drawing near, it sets an extremely high-stakes deadline for lawmakers, as well as low ones. The Senate is set for a week-long Columbus Day holiday that begins on October 11. The House is set to go away without a vote for two weeks starting Monday, October 4.

“We still remain hopeful that the debt-limit impasse will eventually be resolved, possibly through conciliation,” the Barclays team, including Jeffrey Melly and Ajay Rajadhyaksha, wrote in their note last week. “But, in our view, the risk of breach is now greater than at any point in the past decade.”

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