President Barack Obama announced Sunday night that the nation's highest elected public officials have reached a bipartisan debt deal agreement that averts a dreaded U.S. Government default, and that cuts federal spending by at least $2.5 trillion overall by 2021, and by $1.0 trillion immediately.
The announcement of the bipartisan agreement should bring considerable relief to jittery stock, bond, and currency markets -- both in the U.S. and around the world.
That's because the prospect of a U.S. Government default would have stressed the global financial system with a credit constraining event much larger than the Lehman Bros. failure did in 2008-2009. Financial markets are still recovering from that loss, and economists and Wall Street analysts generally agreed that the U.S. Government needed to avoid a default for the captial markets to remain on the road to recovery.
The debt deal, which leaders will present to each chamber's caucus Monday, still must be approved by the Senate and House. The Senate will take up the measure first, and a vote there could occur as early as Monday morning.
Further, if case history is any indicator, the fact that House Speaker John Boehner, R-Ohio, House Minority Leader Nancy Pelosi, D-Calif., Senate Majority Leader Harry Reid, D-Nev., and Senate Minority Leader Mitch McConnell, R-Ky., all support the bill positions the debt deal bill very well for passage. Leaders of each partner would not announce an agreement and bring the bill to the floor of each chamber if they did not think it had very good chance of passage.
Obama said that although the nation should have reached this point sooner, "some very important work was done in Washington" over the past three days, and leaders from each party demonstrated "that they could make the difficult decisions necessary" to each an agreement.
Obama also said the agreement's adequate debt ceiling will "prevent the nation from having to face the debt ceiling issue again in six months, or eight months."
Earlier on Sunday, Congressional Democrats and Republicans approved the outline for the bipartisan, $2.5 trillion debt reduction deal Sunday that would avert a potentially catastrophic default. The deal also received another booster shot when key conservative Tea Party legislators said they will not try to delay a vote on the deal via parliamentary tactics.
If any Senator withholds his or her consent to speed the chambers proceeding, Senate Majority Leader Harry Reid, D-Nev., cannot pass legislation to raise the debt ceiling before Wednesday, a Senate aide told thehill.com Sunday.
Congress needs to raise the debt ceiling by Tuesday, Aug. 2, when the federal government both runs out of money and loses the authority to borrow more money. A failure to do so would likely further upset already-concerned stock, bond, and currency markets, hence the Tea Party "no delay" stance points to a Monday vote on the bipartisan bill.
Delay Tactics To End
Tea Party member U.S. Sen. Mike Lee, R-Utah, said he would insist that any bipartisan bill receive at least 60 votes on the Senate floor, but he would not drag out the process to delay any agreement beyond Tuesday.
"I don't see any reason for not agreeing to an advanced time table," Lee said, thehill.com reported Sunday. "A 60-vote threshold is one thing but there's no reason to run the clock out any more."
The Tea Party's stance in the Senate, if it holds, essentially means that all the bipartisan bill has to achieve is 60 votes -- there will be no procedural hurdles to delay it. To be sure, getting 60 votes in the Senate is not a modest feat, but given the magnitude of the legislation Senate leaders are unlikely to present a bill that doesn't have 60 votes.
Senate Minority Leader Mitch McConnell, R-Ky., was optimistic but warned against premature celebrating.
The emerging bipartisan debt deal includes a two-step process to cut the deficit by about $2.5 trillion over a decade.
Lawmakers have already largely agreed on caps to annual discretionary spending over 10 years. Officials from both parties say that would save $1 trillion, while the nonpartisan Congressional Budget Office puts the figure at $750 billion.
Another $1.5 trillion would be identified by a special 12-member, committee - six Democrats, six Republicans -- appointed by Congress and have automatic "trigger cutbacks" -- including cuts to popular Medicare and U.S. Department of Defense programs - if the committee did not undertake the additional "heavy lifting" to enact the second-stage cuts.
The rationale for the "trigger cuts" argues that the 12-member committee is much more likely to make the cuts if the alternative is deep cuts to preferred programs: Medicare, in the case of the Democrats; Pentagon defense contracts, in the case of the Republicans.
Further, as of Sunday, the proposed bipartisan debt deal did not contain a tax increase or tax reform that would result in higher federal revenue.
Did Markets Help Congress Focus?
To say that Congressional negotiators may have been "nudged" to find common ground by the financial markets after weeks of bitter partisan rhetoric, would be an understatement.
There's an axiom in political science that argues "Congress doesn't react, unless not reacting will result in the wrath of the American voter."
In this case, it may have been "the wrath of the international financial markets" that provided the incentive to avert a U.S. Government default.
U.S. stock markets last week recorded their worst losses of the year, the dollar fell against the yen and Swiss franc, and institutional investors started to move large sums of money into insured bank accounts - all tell-tale signs that a default would not please institutional investors.
Moreover, while no one can incontrovertibly say a U.S. default would freeze credit markets the way the Lehman Bros. collapse, there was near-universal agreement in economics and Wall Street circles that a default would increase interests, and tighten credit, among other negative consequences. That's exactly what the barely-growing U.S. economy does not need now, and the default would have also slowed the global economy.
"If that were to happen [a U.S. default], it has consequences for every family and every business in this country (Britain) and all across the world," British treasury chief secretary Danny Alexander told the BBC.
In other words, more than any other factor, the markets -- and the interdependence of the global economy - may have motivated Congressional Democrats and Republicans to find common ground.
Political/Public Policy Analysis: Sunday night's announced agreement by Obama It is a major step in the right direction, but as noted, nothing has been accomplished until the bill becomes law. What's needed now is a nice, strong passage in the Senate, say a 70-vote or 80-vote approval, 70-30, or 80-20, to send a strong signal to the House.
That said, the caculcation here argues both Boehner and Pelosi should be able to marshall enough votes for the debt deal to pass the House, as well, but probably not as strongly as in the Senate.
Based on Obama announcement, and the tone of remarks from Congressional leaders, we're lowering the risk barometer, on a scale of 0 to 100 percent, of the likelihood of a U.S. Government default, to 15 percent on Sunday night, 5 percentage points lower than Sunday afternoon.
Joseph Lazzaro, U.S. Editor, served as Managing Editor of New York-based financial news web sites WallStreetEurope.com/WallStreetItalia.com, 1999-2004, and as Economics...