Barring a Republican rebellion in the House of Representatives, the Budget Control Act of 2011 will be passed by both houses of Congress on Monday, and sent to the President for his signature.
Despite the resurrection of real market-shifting news on Monday, it’s worth quickly reflecting on the deal. A few other sites have done some post-mortems from a political or policy point of view. But see below for FT Alphaville’s debt ceiling winners and losers. (It was a lot harder to find winners than losers.)
First, for a bit more context here is a helpful flowchart drawn by staffers for Senate Republicans, via Ezra Klein:
1. Brinkmanship. We’re beginning with an abstract noun because no politician deserves to be described as a winner. It’s pointless to judge who had a good or a bad war if that war was a bloody stalemate. But these negotiations — like those over the government shutdown — showed that those willing to raise the spectre of serious economic damage, and display a seething wackiness, can gain the upper hand over an emollient President.
2. Bondholders. Although it was never formally confirmed, leaked reports last week showed that payments to bondholders would be prioritised if the debt limit was breached. Meanwhile, 10-year US Treasuries barely flinched, remaining at or below 3 per cent for the entirety of the impasse.
3. Municipalities. Here us out. As Ezra Klein notes, the common assumption was that medicaid, which accounts for 22 per cent of states’ budgets, was going to be sacrificed to preserve existing medicare entitlements. But it, as well as social security, is to be exempted from the debt trigger. Medicare is now in the firing line, though the Congressional Budget Office’s analysis of the Act says that cuts brought on by the trigger would be limited to 2 per cent.
4. Fundamentals. For all the hubbub and palaver, corporate earnings, payrolls, PMI readings and GDP figures did more to move equity, bond and commodities markets in the last three months than Washington bloviations. Duh! you may exclaim, but it’s a win worth mentioning nonetheless.
5. Congress. Not in the eyes of the people, we stress to add. But with the introduction of “debt triggers“, the legislative branch has strengthened its hold over the executive branch. The White House wanted a “clean” deal — a ceiling lift not linked to cuts. But The Act breaks the $2,000bn+ debt ceiling lift into three parts: clean ($400bn now), dirty ($500bn only after Congress gets to pass a resolution of disapproval!) and filthy ($1,200bn or $1,500bn, depending on the outcome of the joint committee).
6. Millionaires. At least until the end of 2012. The Bush tax cuts are effectively outwith the bounds of the third (“filthy”) debt ceiling lift. This is because the rules of the joint committee, which is being set up to decide how to save a further $1,200bn, are written to take advantage of CBO scoring conventions. The repeal of a tax already factored in to the CBO’s baseline forecast would not count as new deficit reduction measures.
7. Defence stocks. The deal calls for $350bn in cuts from the base Defence budget over the next 10 years, limits “security” spending in fiscal years 2012 and 2013, and puts $500bn of defence spending at stake should the joint committee proposal fail. According to Citi analyst Jason Gursky, worse was priced in. Lockheed Martin, Northrop Grumman, and L-3 Communications were all down over 2.5 per cent at pixel time. It’s a bad day all round, of course, but if better was priced in, surely they’d have fallen by less?
8. The UK. Its economy is flatlining and public sector cuts are yet to really bite. And it would hardly be helped by a slowdown in growth in other rich countries. But compared to the bunfights taking place to its east and west, the UK’s relatively clinical approach to deficit reduction (due mainly to its parliamentary system) looks painless. Checks and balances have their limits.
9. Swiss Franc. The US dollar has been battered by the combination of debt ceiling uncertainty and — more importantly — suffering fundamentals. This is the frothy crest of a secular wave but risk-off currencies such as the Canadian dollar and the Swiss franc have risen over the period. The search for an alternative to the USAAA may well continue now that US political risk is finally being assimilated into market opinion.
10. Cliches. Debtmageddon! Debtocalypse! Countdown clocks! This West Wing video. Few observers — including this blog –have managed to avoid them. As William Safire famously observed: “”Last, but not least, avoid cliches like the plague.”
For FT Alphaville’s 10 debt ceiling losers, click here.