Busch: Four US Debt Ceiling Scenarios
1. McConnell-Reid or Plan B
This plan gives the President the authority to raise the debt limit in three tranches and would link it to a package of spending cuts. It would give the President power to raise the debt limit through 2012 in three installments, unless two-thirds of Congress voted to block it. "It likely would not include any tax increases," a senior Democratic aide familiar with the discussions said. This is critical as the House Republican caucus would not likely go along with any bill that has revenue raisers or tax increases included in the plan.
This continues to evolve as Senate Majority Leader Harry Reid works with McConnell to craft a plan that will gain a larger amount of votes. Moody's analyst Steven Hess said Plan B would avoid any immediate downgrade of the US AAA rating, but that the plan may result in a negative outlook in the rating due to the lack of significant cuts.
Probability of Passage: 50%
2. Gang of Six
The Senate Gang of Six finally produced a plan that has $3.7 trillion in cuts and a debt ceiling hike. Sen. Tom Coburn (R-Okla.), said the plan would reduce the deficit by $3.7 trillion over the next 10 years and increase tax revenues by $1 trillion by closing a variety of special tax breaks and havens. He said the Congressional Budget Office would score the plan as a $1.5 trillion tax cut because it would eliminate the Alternative Minimum Tax. It has many more moving parts than Plan B as it includes individual and corporate tax reform along with Social Security reform.
President Obama supported the new plan stating, "The good news is that today, a group of senators, the Gang of Six... put forward a proposal that is broadly consistent with the approach that I've urged."
However, both Sen. Reid and Speaker of the House John Boehner have said this plan is a no go. Reid/Durbin have said there isn't enough time to write the bill and have it scored by August 2nd. Boehner's spokesman said that the plan falls short of Republican goals. Rep. Paul Ryan wrote that the G6 plan will increase revenues by $2.8 trillion. The good news is that parts of this plan may be included in Plan B.
Probability of Passage: <10%
3. Cut, Cap and Balance
The US House of Representatives passed this plan on Tuesday. The Hill reported that the vote...was designed in part to demonstrate that an increase in the debt ceiling, loaded with spending cuts and reforms, could win the support of House conservatives. "Boehner and House Majority Leader Eric Cantor (R-Va.) have said none of the plans the president has floated in White House meetings could pass the House." Unfortunately, the President has said that this bill would be vetoed if it came to his desk.
Probability of Passage: 0.
While this didn't seem possible 4 weeks ago, the collapse of the $4 trillion "Grand Plan" between President Obama and House Speaker Boehner greatly increased this probability. The reason lies with the political stances of both parties. Note this comment from President Obama's news conference yesterday: "What it (the Gang of Six plan) says is, we've got to be serious about reducing discretionary spending, both in domestic spending and defense, we've got to be serious about tackling health care spending and entitlements in a serious way, and we've got to have some additional revenue so that we have an approach in which there is shared sacrifice and everybody is giving up something."
The revenue angle is the key point to keep in mind for the potential passage of any bill. Democrats want the Republicans to "give" on raising revenue while the Democrats "give" on reducing health care and entitlement spending. The problem is that many House Republicans signed a pledge not to raise the debt limit, many House Republicans signed a pledge not to raise taxes and many House Republicans stated "No Compromise" when they came into office. They believe they will lose their primary if they vote to raise taxes.
This will likely be a short term event with a back-up plan to the Plan B backup plan of a 30 or 60 day debt limit extension. August 3rd, the US Treasury has a $23 billion social security payment that will be missed. However, they will have the funds available on August 5th. The next important date is August 15th when the US Treasury will have to make an interest payment to debt holders of $29 billion. There is an excellent review of the day-to-day receipts and outlays at the Treasury by the Bipartisan Policy Center entitled "Debt Limit Analysis."I highly recommend reviewing it.
Probability of Default 40%
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.