With passage of the FY 2011 budget deal done in the House, the Senate will shortly give its approval, President Obama will sign the legislation into law and the US government will be funded through September of this year.
The debate now moves to the much thornier issue of the debt ceiling, which will likely win House approval only if genuinely substantial cuts for FY 2012 are agreed to by the Democratic-controlled US Senate and the Obama Administration.
To set expectations, the Administration dispatched Treasury Secretary Tim Geithner to talk about what happens next with the press.
“You see a lot of confidence in markets that the American political system will be able to get on a path [to resolving the fiscal problems],” (Mr. Geithner) told the Financial Times today. “The markets believe that our problems are manageable and our system will solve them. There is no conceivable way that Congress would take the risk [of forcing a default].”
Gillian Tett of the FT asks the obvious question: Do the markets believe Secretary Geithner’s patter? Her answer (paraphrased): “they hope he’s right, but just in case….”
Ms. Tett writes:
“…what is less visible – and more ominous – is that, behind the scenes, some large asset managers and banks are already discreetly debating contingency plans, not just for a spike in yields but also a technical default.
“There are all kinds of ‘what if’ scenarios being discussed,” one senior banker confesses. And while such “what if” scenarios are still viewed as extreme, the big question dogging Mr Geithner now is what exactly does Washington need to do to maintain this sense of calm? Is it enough for Mr Obama to simply call for a $4,000bn plan? Would a deal on the debt ceiling be enough? Or is a tangible fiscal plan required? Where, in other words, does the $14,000bn sentiment tipping point lie?
The honest answer, of course, is that nobody knows; or not unless that tipping point is reached. But some seasoned heads in the White House think that there are now three crucial variables to watch: first, the “acknowledgment” issue (namely whether politicians recognise the fiscal problem); secondly, the “process” question (whether there is a constructive debate); and thirdly, the “plan” (namely whether there are credible proposals on the table). If two out of three of these items are on the checklist, the argument goes, investors will remain reassured. If not, trouble looms.”
This strikes us as more or less spot on. You can read Ms. Tett’s full column here.