Special Market Commentary

by Jim Baird on July 20, 2011

The U.S. Debt Ceiling & Deficit Reduction Plan: Precarious Politicking

Executive Summary

  • Details are still sketchy, but the tenor in Washington has quietly shifted toward serious negotiations to reach an accord to raise the Federal debt ceiling.
  • Leaders in both parties recognize the severity of not raising the debt ceiling; while there are clear philosophical differences between – and even within – the two parties about how best to reduce projected deficits, we believe that sufficient bi-partisan support is coalescing in both Houses that a compromise bill will be reached before the August 2 deadline.
  • The possibility still exists that temporary setbacks in negotiations could contribute to market volatility. Investors should be prepared for that possibility, but recognize that attempting to time the markets in reaction to the daily flow of news is treacherous.
  • Even if a deal is reached, the wild card is the possibility that one or more of the major bond rating agencies could still decide to downgrade the U.S. Government’s current AAA-rating.
  • The need to raise the debt ceiling is clearly the urgent issue; substantive changes will still be needed in the years ahead to adequately address the nation’s structural deficits. The bills under consideration right now are the first step in what will need to be a long, challenging national dialogue about tax policy, federal spending, and, ultimately, the role of the Federal Government in the decades ahead.

The United States is now less than two weeks away from the August 2 deadline for the passage of a bill to raise the Federal debt ceiling. Missing this deadline increases the risk of a default and the potential for the U.S. Government to be stripped of its AAA debt rating by one or more of the major credit ratings agencies. The politicking, posturing, and finger-pointing in Washington has become more heated in recent weeks, and fears have been rising that the process could break down. While the final outcome is still far from clear, developments in recent days point to progress that reinforces our view that a deal will likely be reached in time.

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