A Deal is Done: Washington Raises the Debt Ceiling and Ends the Shutdown
As co-chair of Invesco’s Investors’ Forum*, I and Invesco’s investment professionals have been continually monitoring the political situation in Washington D.C., and we were pleased to see last night’s passage and presidential signature of a Senate-led bill that raised the debt ceiling and ended the government shutdown.
What the agreement does
The agreement, which was announced on Wednesday, is by no means a long-term fix to the underlying issues that divided Congress. It raises the debt ceiling through Feb. 7 and funds the federal government through Jan. 15, ending the 16-day government shutdown and sending hundreds of thousands of furloughed employees back to work. As with other debt ceiling deadlines, that Feb. 7 date will be an approximate date, as the agreement preserved the Treasury Department’s flexibility to enact extraordinary measures that buy it additional time to keep paying the nation’s bills.
The agreement also creates a conference committee to discuss broader budget issues, such as whether to renegotiate the deep budget cuts that were enacted earlier this year due to the sequester.
What the agreement does not do
Defunding the Affordable Care Act, or “Obamacare,” was the focal point of many Republican lawmakers during the past few weeks, but the agreement comes nowhere near it. Rather, it provides additional measures to confirm the eligibility of people who receive subsidies to buy health insurance. Therefore, the enrollment process that began Oct. 1 will continue.
Additionally, a new tax on existing health insurance plans will go on as scheduled, despite the desire of Democrats to postpone it.
Looking ahead to Feb. 7
While the agreement came in time to avoid hitting the debt ceiling, we would have liked to have seen a deal completed earlier — and we’d like to eventually see a deal that brings longer-term certainty and confidence to the markets. Ongoing political stress has taken its toll on the markets, hitting investor confidence and causing market volatility. And despite the fact that the US could have paid its immediate bills — for a time — after today’s deadline using cash on hand and incoming tax receipts, that’s a precarious position for the country to be in. We hope that lawmakers will approach the Feb. 7 debt ceiling deadline with this experience in mind.
As far as the rating agencies are concerned, the agreement to end the shutdown and raise the US debt limit ends the very near-term potential for downgrade by Fitch Ratings. Nevertheless, in its press release announcing the action to put the US rating on Rating Watch Negative, Fitch commented, “In the event of a deal to raise the debt ceiling and to resolve the government shutdown, which Fitch expects, the outcome of a subsequent review of the ratings would take into account the manner and duration of the agreement and the perceived risk of a similar episode occurring in the future.”
Clearly further negotiations will be required next year with yesterday’s action to “kick the can down the road.” Fitch will factor in such requirements as it conducts its review.
* The Investors’ Forum brings together each of Invesco’s 700-plus investment professionals from around the world.Tags: