Scary words from today’s research note by Chris Krueger, ace political analyst at Guggenheim Partners’s Washington Research Group:
There is no evidence to suggest that the debt ceiling will be raised in time.
Now you can sort of see an end-game over the budget and continuing resolution. Eventually the House passes a “clean” CR thanks to a promise from GOP leaders that they will take the Obama White House to the mat over the debt ceiling. Something like that.
Then it gets real. The White House strategy has three parts: 1) don’t negotiate, 2) don’t blink, 3) remember not to negotiate or blink. The GOP, on the other hand, doesn’t really have a plan and is far from unified on what they want to get from Obama or how exactly the battle should play out.
Who is going to blink? The non-scary options — Obama offering a quid pro quo, raising the debt ceiling by congressional disapproval and an Obama veto, a straight hike in the debt ceiling — require someone to blink.
Then you have the unilateral options where Obama just flat out bypasses Congress, both of which would likely freak out markets. Krueger:
Constitutional Option. The debt ceiling forcing mechanism could be demolished if Obama invoked the “constitutional option” and unilaterally raised the debt ceiling. Among other things, the 14th Amendment of the Constitution states the validity of the public debt shall not be questioned. Under this option, Obama would invoke the 14th Amendment and unilaterally raise the debt ceiling – a move that was encouraged by former President Clinton during the summer of 2011 in the height of the debt ceiling stare down. This option would trigger a wave of lawsuits and a likely Supreme Court decision. The biggest problem with going this route would be to – in effect – set up two tranches of Treasuries. Those that are not subject to a legal challenge (issued under the old debt ceiling) and treasuries that are subject to a legal challenge, which would likely trade at a discount. This is an unlikely end result, but one that could happen if we get past the X-date without Congressional action.
Platinum Coin Option. This is even more theoretical than the Constitutional Option, though some argue that it is a stronger legal option. There are limits on how much paper money the U.S. can circulate and rules that govern coinage on gold, silver, and copper. BUT, the Treasury has broad discretion on coins made from platinum. The theory goes that the U.S. Mint would create a handful of trillion dollar (or more) platinum coins. The President would then order the coins deposited at the Fed, who would then put the coin (s) in the Treasury who now can pay all their bills and a default is removed from the equation. The effects on the currency market and inflation are unclear, to say the least. You would also likely trigger a wave of lawsuits similar to the Constitutional Option and create two tranches of treasuries. We do not see the platinum coin option as a viable solution.
At this point Krueger sees a 40% probability the US enters “technical default scenarios” in late October or early November due to a debt ceiling impasse.