As we head into the weekend, a debt ceiling deal remains elusive. The debates and negotiations are over. The politicians have taken to the airwaves and are pointing fingers and laying blame. It is unfortunate because the current situation could have been avoided; yet, due to political tactics, the economy and our markets hang in the balance. While we watch and wait, here are five questions that need to be answered.
1 - Will the Debt Ceiling Be Raised? It may not. Currently, there are no bills on the table. We have lots of "quote, end quote" plans. The "Boehner" plan, the "Reid" plan and the "McConnell" plan, but there is no real, bi-partisan plan to pass the House and Senate. If there is no plan by Tuesday, the debt ceiling will not be raised. Will any of the "plans" turn into agreements? If recent history is any indication, I a not sure we should count on it.
2 - Is the 10 Year Treasury Yield Making a Deal More Difficult? For weeks, if not months, we have been hearing that the failure to raise the debt ceiling will lead to financial Armageddon and market chaos. However, as we get dangerously close to August 2nd and the downgrading of the United States appears certain, the 10 year treasury yield is going down, not up.
On July 1st, the 10 year treasury rate was 3.22 percent. Yesterday, it was 2.98 percent. This may embolden those members of Congress who argue that predictions of economic disaster are severely over-stated and may convince them that sticking to their principles of cutting, capping and constitutionally balancing are worth the economic risk.
3 - Does a U.S. Downgrade Matter? Yes. Of course a U.S. downgrade matters. Some argue that it doesn't. Specifically, if the U.S. drops from AAA to AA, but there are no AAA rated countries, then we are still on top. Right now, we don't deserve the top rating.
We are dangerously over-levered, our economy is poor and we need to make incredibly tough decisions that will cause pain. And, the last few months have demonstrated that our political leaders may not be able to get together to make the right decisions. Moreover, we are watching the strength of the dollar decline. The current trajectory of our economic strength as a nation is weakening. This should not be acceptable.
4 - Is the Great Recession Really Over? Second quarter GDP grew 1.3 percent. 1.3 percent! That's with QE2, artificially low interest rates and stimulus. With the end of QE2, the austerity measures that will be put in place under whatever deal is finally cut, a continued and long-lasting housing slump and high unemployment, the economy is not going to grow. If we don't get a deal in place soon to start resolving our debt crisis, uncertainty will reign and businesses will continue to hoard cash and refrain from making growth investments. That would make things even worse. However, we shouldn't be surprised. The Great Depression lasted for more than 10 years. Why do we expect the Great Recession to last less than half that?
5 - Will Public Anger Boil Over? At first, the public and the media watched the debt ceiling debate with detached amusement. Over the last few days, as we have watched the political rhetoric and finger pointing increase and serious discussion about the economic consequences fade away, anger has increased. Last night and this morning, the media, whether on CNBC, CNN or FOX, was lecturing politicians and, at times, raising their voices while they pleaded with them to be reasonable and to cut a deal. The public is now starting to pay attention and is scratching its head, asking whether politicians may really create an economic crisis. If the debt ceiling is not raised, markets lose value and the economy falters, will the public's anger rise? Are we sitting on a powder keg?
Will a deal be struck this weekend? Will the debt ceiling be raised? Can we avoid a downgrade? Are we really experiencing this politically-created debacle? Only this weekend will tell.
Jon Henes is a partner in the restructuring group at Kirkland & Ellis LLP where he has led some of the most complex restructurings in the United States and abroad across a variety of industries, including media, chemicals, energy, manufacturing, real estate, retail and telecommunications. Jon has also frequently appeared on CNBC's "Worldwide Exchange" as a guest expert on various financial and economic topics, federal, state and local fiscal issues.