Republicans To Lower The Cost Of Raising The Debt Ceiling

In all likelihood the US debt ceiling will need to be raised no later than this coming March. The question now is whether we are going to see a repeat of last October’s game of chicken. According to Deutsche Bank, the US sovereign CDS spread has stabilized, with market participants not anticipating a major disruption (note that US CDS is fairly illiquid with “lumpy” trading activity).

Source: DB

The showdown in October, followed by the ugly rollout of the ACA Health Insurance Marketplace, has changed the political landscape. As a result, the Republicans’ debt limit demands may have shifted away from the original “dollar-for-dollar” spending cuts requirement (the so-called “Boehner Rule” ). And the new ask may be considerably smaller.

The Hill: – Mark McKinnon of Hill and Knowlton Strategies said the “equation is pretty clear.” 

“When Republicans screw with the debt ceiling and threaten a government shutdown, their unfavorable ratings go up. When they talk about Obamacare, Democrats’ unfavorables go up,” he said. 

The GOP demands are likely to be small, a former top GOP aide now on K Street said. That’s because conservative lawmakers and Republicans feeling primary heat will be unlikely to back any debt-limit boost,meaning House Republicans will probably need some Democrats to come to their side. 

“Members are going to be very close to their primaries by the time they vote on something in mid-to-late February,” the former aide said. “Anyone voting for that who has a contested primary will be in trouble. Meaning, leadership will need a healthy number of Dem votes….[so] it has to be very small ball.” 

“Most Republicans see that the shutdown was a mistake, and that there is more pragmatism in dealing with the debt ceiling,” said strategist Ron Bonjean.

What will the Republicans ask for in return for the debt ceiling increase? Here are some thoughts from Goldman’s Alec Phillips: