Senate Passes Debt Ceiling/Govt Funding Deal: Here’s What Happens Next

Moments ago the Senat passed the debt ceiling/government funding/hurricane aid deal, cobbled between Trump and the Democrats to howls of protest from the GOP, in an 80-17 vote.

As a result, the debt limit will be suspended until December 8 and and fund govt through Dec. 8; it also provides $15.25b in disaster funding for hurricane assistance.  A vote in the House is expected tomorrow, where the bill will also pass: it will be interesting which Republicans vote against the Trump/Democratic proposal.

As discussed yesterday and this morning, the deal has faced widespread opposition in the GOP, particularly among conservatives. Though Republicans support helping communities devastated by Hurricane Harvey, many are loath to raise the debt ceiling or fund the government without spending or entitlement reforms.  The Republican Study Committee (RSC), the largest GOP caucus in the House with more than 150 members, came out against the deal on Thursday, calling it irresponsible. The RSC’s opposition means the deal might pass the House mainly with Democratic votes — an unusual dynamic with a Republican in the White House.

Meanwhile in the Senate, while few Republican senators were happy with the deal, they thought Trump was within his rights to make it. “I think Senator McConnell said it’s the president’s prerogative to cut a deal if he wants to. And he apparently thought that was advantageous,” said Sen. John Cornyn (R-Texas), the No. 2 Senate Republican. But Cornyn added he would have preferred to have a longer extension noting that “lifting the debt ceiling is always unpleasant and usually we like to have some offsets or reforms.”

The surprise agreement left GOP leadership with a tough sale to rank-and-file members and an unenviable December schedule, when they’ll need to wrangle together another agreement to avoid a shutdown and raise the debt ceiling for the second time in three months.

Sen. John Thune (R-S.D.) quipped to reporters that, “I guess we’ll address all the issues again in December. It will be a good holiday for you guys, sticking around.”

Trump administration officials touted the agreement as a move to help clear the decks and make room for tax reform, another key GOP agenda item that has been on hold.

* * *

So what happens next?

Well, for one thing, the next “X-Date”, or tha day when the Treasury runs out of cash and uses up emergency measures, is not December 15 as some still erroneously believe (as explained last night), but sometime in the first quarter, perhaps as far ahead as August, although according to a just released analysts by Goldman, the net debt limit increase will be due March, meaning the US has just bought itself another 6 months before this week’s farce has to be repeated.

Logistics aside, and these are explained below, the question for Democrats is whether the 6 month debt-extension interval falls inside the 6 month extension period on DACA before Congress has to vote on whether or not to keep Dreamers in the US, a political “quid-pro-quo” in exchange for not shutting down the government. Should the debt ceiling negotiation fall outside the DACA term, it would result in another violent breach between Trump and the Democrat leadership.

Political maneuvering around DACA aside, what’s next for capital markets? Here are the details from Goldman’s chief political analyst Alec Phillips:

With the text of the final version of the Senate amendment now posted, we estimate the next debt limit increase will be necessary by March, rather than between March and August as we noted earlier today. 

    1. The Senate Appropriations Committee has posted the final version of the fiscal amendment expected to be voted on tomorrow by the Senate. Contrary to an earlier version that had been published by various media outlets, the final version does not allow the Treasury to keep a $150bn cash balance at the time the debt limit is reinstated. Without this, we estimate the debt limit will need to be raised by March.
    2. Two unknowns could affect this timing somewhat, beyond the usual fluctuations in tax receipts. First, there is some question as to whether the Treasury can fully replenish the “extraordinary measures” it uses to preserve borrowing authority once the debt limit is reinstated. Since those measures have essentially been exhausted ahead of the current deadline, with the reinstatement coming so soon, it is possible that the Treasury might not have time to replenish them, and that the amount of extraordinary measures could be smaller than normal. This is hard to evaluate but we note that after the last debt limit increase, the Treasury notified Congress that about 2/3 of the total amount of extraordinary measures normally available had been replenished roughly one month after the debt limit was suspended, and that they were fully replenished roughly three months after the last suspension. Since the debt limit suspension lasts roughly three months, we assume that most of the typical amount of extraordinary measures will be available to the Treasury.
    3. Second, it is possible that outlays related to Hurricane Harvey, and potentially Hurricane Irma or other storms, could increase the deficit in the near term and bring the date forward somewhat. We note that based on the experience in prior hurricanes, spending tends to be spread over many months, so only a fraction of the headline figures discussed would be spent after the debt limit is reinstated in December 2017 and March 2018. For reference, it would probably take additional spending of $30bn or more per month during that period to pull the deadline forward from March to February, all other things being equal.
    4. Regarding timing of the legislation, the Senate is expected to vote tomorrow morning [it just passed], followed by the House tomorrow afternoon. Many Republican lawmakers have expressed opposition to this agreement, but at this point this does not appear to be an obstacle to passage. That said, changes are clearly still possible related to the substance of the agreement or the probability of passage, so changes to the outlook for the debt limit are still possible.


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