Understanding a Last-Ditch Deal to Avoid Default 

Peter Lefkin 

 

10/16/2013 

Peter Lefkin, head of government and external affairs at Allianz of America, walks you through the events leading up to the Treasury’s Oct. 17 debt-ceiling deadline and how lawmakers were able to end the government shutdown and avert a US default.
At the time of this writing, Senate leaders in both parties have reportedly agreed to an eleventh-hour deal to temporarily raise the US debt ceiling and put an end to a 15-day government shutdown. The Senate bill staves off a US default, but it would only restart the clock for lawmakers to reach a compromise by early 2014. It’s unclear when a final vote would occur but the House is expected to approve the measure today.

With the Treasury’s Oct. 17 deadline just hours away and Fitch warning on Tuesday that the United States’ AAA credit rating is under review for downgrade, the market finally got the reassurance from Washington it was looking for. Here’s the latest dispatch from longtime lobbyist Peter Lefkin on the fiscal fights and the events that led up to today’s agreement.


Lawmakers have reached a compromise that would end the shutdown and raise the debt ceiling. Senate Majority Leader Harry M. Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) announced a bipartisan deal on Wednesday to raise the debt limit through Feb. 7 and end the 16-day government shutdown. Much of the progress came in the final days as saber rattling gave way to sensibility. Democrats had been looking to avoid further cuts from sequestration, while Republicans viewed the sequester as a useful fiscal tool. The new deal establishes a familiar framework: a combined Senate and House Committee to craft a replacement for sequestration that would have to report back its recommendations by Dec. 13, 2014. Remember the Super Committee? Additionally, furloughed government employees will be given back pay and Americans seeking health-care coverage under Obamacare will be subject to income verification.

The Senate bill doesn’t call for any significant changes to Obamacare. And it doesn’t repeal the medical device tax that all Republicans and some Democrats oppose. A handful of lawmakers are still hopeful that the tax could be delayed for a few years. The Senate plan includes the more modest goal of imposing greater verification requirements on people who receive insurance subsidies under the Affordable Care Act. It would also delay, until 2015, a reinsurance tax of $63 per covered person that’s designed to assist in stabilizing premiums. Unions have strongly opposed the tax because it raises costs for their members.

Having angered the public with the shutdown, Republicans lost much of their political strength, a reality that’s been prominently portrayed by the president and congressional Democrats.”

- Peter Lefkin


Sen. Cruz bears the brunt of the blame for the shutdown. Most Republicans are still angry at Sen. Ted Cruz (R-Texas) for pushing what they perceive as a foolish strategy that accomplished very little. For his part, Cruz spent Monday evening at a Capitol Hill restaurant with about 15 to 20 Tea Party House Republicans, urging them to hold out and demand more than what Senate Minority Leader Mitch McConnell (R-Ky.) was getting from Majority Leader Harry Reid (D-Nev.) Having angered the public with the shutdown, Republicans lost much of their political strength, a reality that’s been prominently portrayed by the president and congressional Democrats.

House Republicans failed to pass a competing proposal. To placate conservatives and to assert their relevance, House Republican leaders revealed their own plan on Tuesday. House Speaker Boehner, bowing to the will of his caucus, said that the House would vote on its own bill, thus inviting the Senate to negotiate. The idea was that the House Republican Majority would be able to gain more concessions than the Republican Minority Leader in the Senate. It didn’t work out that way.

Ultimately, the Republican criticisms of the House deal were that the debt limit would be lifted for too long, it would retain almost all of Obamacare and Congress would face another fiscal fight right when it reconvenes after the December holiday season. Heritage Action, a leading conservative group, spoke out against the carefully negotiated Boehner-Cantor-McCarthy message, making many conservatives concerned that a vote for the bill would be an open invitation to a Republican primary against them in 2014 by a Tea Party advocate. Meanwhile, Fitch put the US government on a ratings watch causing Republican moderates, who are drawing the ire of their constituents over the shutdown, to say it was time for the drama to end.

Facing revolt from his right and left, and having no Democratic support, Boehner conceded defeat, and withdrew the proposal Tuesday night. The Republican caucus started Tuesday’s session by singing “Amazing Grace,” but it ended with a death knell for the House plan. Republicans woke up on Wednesday wondering what happened. A few weeks ago, they were intent on blocking government funding unless there were significant changes to the Affordable Care Act. They were also resolute that any increase in the debt ceiling should be matched by corresponding reductions in mandatory spending. Alas, neither has happened.

The Senate decided the outcome but Sen. Cruz could delay it getting to the president. The negotiations went back to Majority Leader Reid and Minority Leader McConnell, who resumed their discussions just minutes after the Boehner-driven plan collapsed. At the same time, a bipartisan group of 14 US senators were sketching out their own plan that’s reportedly not too different from the Reid-McConnell plan. In the end, the two sides were able to strike a deal.

However, Sen. Cruz, who single-handedly led the Republicans to defeat, may still try to block the Senate from voting on the Reid-McConnell proposal. They’re working against an Oct. 17 deadline when the government hits its borrowing limit and risks default. But Treasury Secretary Lew has a few tools in his arsenal that can delay default at least a few more days, if that occurs. And many of the US government’s liabilities aren’t due until Nov. 1.


The Upshot For more insight on the investment implications of the ongoing budget battles and debt-ceiling debate, read The Upshot, our weekly market commentary featuring Kristina Hooper.

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The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

 

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Key Tenets of Senate Plan
Reopens government effective immediately
Extends funding for government operations until Jan. 15, 2015
Raises debt ceiling temporarily until Feb. 7, 2014
Forms bi-partisan task force to come up with recommendations for reducing the budget deficit by Dec. 13, 2013
Requires income verification for health insurance exchange subsidies
Mandates that furloughed workers receive back pay
Market Insights 
AGI-2013-10-16-8019 

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