Is A Debt Ceiling Crisis Way More Likely Than The Market Is Realising?

In an email to clients this morning, SocGen analyst Kit Juckes writes:

There is a view in Washington that financial market participants are a bit too optimistic about the prospects for the US debt ceiling being raised. Guilty as charged. Observing a man holding a loaded shotgun, pointed at his own foot, I imagine common sense will prevail in time for tragedy to be avoided. And yet……

Juckes is correct here.

There is definitely a gap between how Washington people feel about the debt ceiling and how participants in financial markets feel about it.

Financial markets think it’s all just noise.

Washington types think it could be different this time.

Back in July we highlighted the analysis of Eurasia Group’s Sean West, who explained the debt ceiling dynamics, arguing that there was no inclination on either side for negotiation or a deal. The White House won’t negotiate, Democrats don’t want to negotiate, and the GOP is stuck in its positions.

WSJ points out today that the rise of a resurgent liberal wing in the Democratic party is giving Obama less room than ever to negotiate on fiscal issues.

At Wonkblog, they’re talking about how 2013 could be worse than 2011. Ezra Klein and Evan Soltas: “There is, quite literally, no shared ground for a deal.”

Watch markets to see if the Washington view of things starts to take hold.

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