Over the weekend, Morgan Stanley reminded its clients that perhaps the biggest threat facing markets over the coming weeks is the ‘three-headed policy monster’ inside Washington: raising the debt ceiling, passing a budget and embarking on tax reform. As MS cross-asset strategist Andrew Sheets noted, “none are easy, but we see the debt ceiling as the most immediate test.”
He then cautioned that while the most likely outcome is that, after some tension, the debt ceiling gets raised “we don’t think it will be easy, or smooth, and it may require some form of market pressure to get different sides to fall in line. I’ve spoken to investors who are comforted by FOMC transcripts from 2011 that discussed prioritization of debt payments in order to avoid default. I am not. First, I worry that this reduces the urgency of what remains a serious issue. Second, this prioritization would require delaying payments to programmes like Social Security and Medicare, with real human and economic cost. And third, while the mechanics of this prioritisation may work, it is untested in a live environment.”
Perhaps sensing that the market is getting increasingly concerned about the potential standoff over the debt ceiling debate, which could eventually lead to a technical default, moments ago Treasury Secretary Steven Mnuchin, speaking at an event in Louisville, said that “we need to raise the debt limit and it’s my strong preference is that there’s a clean raise of the debt limit.”
This post was published at Zero Hedge on Aug 21, 2017.