The debt ceiling deal still needs to be passed by both Houses of Congress. The Senate is expected to vote by lunchtime and approve the deal very easily. The House will probably vote this evening, support will be needed from both Democrats and Republicans, given that a number of members of both parties are unlikely to support the measure.
Market pricing is assuming that the deal will be ratified from here. Some measure of risk is being applied, especially through the equity market. A rejection of the bill this evening would likely create a significant risk-off event.
The principle elements of the deal so far:
1. The first stage of deficit reduction would be $900b
2. The second stage of deficit reduction would be $1.5t, to be defined by a bipartisan special committee of lawmakers appointed by leaders of the House and Senate (more commissions).
3. If the special committee fails to deliver a deficit-cutting package that would trigger $1.2t in cuts, 50% would be defense cuts and the other 50% would be non-defense cuts, exempting low-income Social Security and Medicaid programs and only affecting providers in Medicare.
4. The debt ceiling increase would be done in three phases: $400b initially, another $500b by the end of 2011 subject to a vote of disapproval, and a third increase of $1.5b to get the rest through 2012, also subject to a vote of disapproval.
There is a provision to have Congress vote on a balanced budget amendment. This vote does not have to succeed to leave the deal intact and is unlikely to pass the Senate.
What will the rating agencies think of this? Potentially, there is a good chance that the US will be downgraded by a notch by ‘one’ of the agencies. Why? The deal is not the $4t expected and there remains a strong possibility that the “debt ceiling†may not be raised in the future.
