The Key Points That Could Complicate A Debt-Limit Deal

(Bloomberg) -- Republicans and Democrats aren’t alone in playing chicken over the federal debt limit — investors, too, are staring down at the risk of financial catastrophe..While pockets of the US Treasury market, along with a number of derivatives contracts, have reflected rising concerns about a potential federal payments default, that’s not true for the stock market. The S&P 500 Index is up about 8% for the year..The irony is a broad equities selloff and a shellacking to voters’ 401(k) retirement savings could trigger a deal in Washington. But it’ll take getting closer to the date when the Treasury Department is likely to run out of cash, the so-called X-date..“Pain is a part of how we solve this,” said Benjamin Dietrich, a portfolio manager at Lazard Asset Management LLC. “If this really goes beyond the X date, then we are in a world of pain, and the market will price a certain probability for that.”.For now, Democratic and Republican negotiators face a different imperative — of battling to the brink, lest their party bases complain they haven’t fought hard enough..Here’s what’s being discussed, and what may complicate a final deal: .Spending caps.As President Joe Biden and House Speaker Kevin McCarthy prepare to meet Tuesday, the two parties are discussing setting topline spending caps, with trillions at stake. Republicans want to slash domestic spending over a decade, while Democrats prefer smaller cuts — in defense and social programs — over a couple of years. .Hawkish Republicans like Senate Minority Leader Mitch McConnell want to increase defense spending, especially with the war in Ukraine continuing. Democrats, at the same time, would balk at caps that squeeze the environment, health care and other priorities — especially if the Pentagon budget is protected..Covid clawbacks.Republicans want to rescind unused Covid-19 funds and Biden has said they are on the table. The nonpartisan Congressional Budget Office says about $56 billion could be taken back while the House Budget Committee says it’s closer to $64.6 billion..Work requirements.House Republicans passed new work mandates for able-bodied Americans on Medicaid, and stricter ones for those using the food stamp program or welfare. That would save $120 billion over a decade, according to the CBO, with $109 billion coming from Medicaid..Biden has previously supported tougher work requirements but says he wants to leave the Medicaid health insurance program for the poor untouched. Doing so would decrease the size of the cut, risking conservatives’ support. But tougher work standards for the Supplemental Nutrition Assistance Program, or SNAP, along with the Temporary Aid to Needy Families program, would still give Republicans an ideological trophy..Permitting reforms.Both parties want to accelerate the permits process for energy and other projects, though they differ on the details as they search for compromise. Democrats have focused on speeding approvals for renewable energy projects, transmission lines to deliver that energy to markets and the mining of critical minerals needed for electric vehicles. Republicans are more insistent on easing hurdles for fossil fuels..Short-term deal.If lawmakers can’t reach a broader deal, one option would be to increase the debt limit by, say, $100 billion or so, to give themselves more time to negotiate. Nobody ever wants a short-term deal until they have their backs to the wall, however. Democrats would prefer to simply suspend the debt ceiling until after next year’s election. .Procedural obstacles.Bills like this one usually are locked down on the House floor using a rule known as “martial law” to prevent any amendments that could sink the deal. If McCarthy did that, though, he could anger his right flank. The Senate, where one member could stall a measure for days, poses another problem. Bottom line: This isn’t something you want to be hammering out an hour before a default..Wild cards.Perennial issues like immigration and border security could affect the talks if more Republicans, like Representative Chip Roy of Texas, demand that they be addressed. Democrats want to include prescription drug price cuts. But these kind of complex — and divisive — issues often get dropped the closer the nation gets to default. .Market Takeaway.While averting default will doubtless be applauded by investors, there could still be pockets of pain..“We are seeing some marginal weakness in the shares of companies that rely on government spending — if there is bipartisan support for cutting spending across the board, I would expect further weakness in those stocks,” said Jessica Bemer, a portfolio manager at Easterly Investment Partners.More stories like this are available on bloomberg.com.©2023 Bloomberg L.P.

The Key Points That Could Complicate A Debt-Limit Deal

Here’s what’s being discussed, and what may complicate a final deal.

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