The so-called Super-Committee — the committee of six Republicans and six Democrats that’s been tasked with coming up with coming up with a deficit reduction plan — is getting closer and closer to its deadline of November 23.
You remember the drill: If they can pass something then it goes to all of Congress to approve. If it doesn’t pass, then cuts automatically happen to defence and healthcare.
Anyway, get ready, because it’s coming back onto the market’s radar.
Two fresh notes speak to some of the issues.
First, from Dan Greenhaus at BTIG on what investors expect. The answer is: Nothing:
As BTIG’s strategy team, we have the wonderful pleasure of meeting with some of the best and brightest minds on Wall Street and one thing we can say with total certainty is that nobody paying even a modest amount of attention thinks the super committee will come forth with any respectable debt package. Not one. To be clear though, the committee has been meeting quite often but has been doing so behind closed doors so we don’t really have much information as to what they have been doing. What we do feel comfortable saying is that there appears to be consensus on about $800 billion of deficit reduction while disagreement exists surrounding the remaining $400 billion. It has been our working assumption that given the broad disagreements on tax and spending policy, the Congress will end up agreeing to a package of about $800 billion in reductions while legislatively “ignoring” the rest, something we noted way back in early August in Spending Triggers, Budget Amendments and Other Mythical Creatures.
But just because people have such low expectations, doesn’t mean it doesn’t matter.
While the composition of whatever agreement the super committee reaches is clearly important, its ability to reach any agreement at all does still matter, for two reasons. First, although rating agencies have indicated that failure in the super committee is not by itself necessarily a reason for further negative ratings action–Moody’s indicated today that “failure by the committee to reach agreement would not by itself lead to a rating change”–there would nevertheless be a risk of a negative market reaction to failure to produce any type of proposal by the November 23 deadline. Second, the super committee remains positioned as the most viable vehicle for extension of the payroll tax cut and possible business-focused incentives, which we assume in our forecast, as well as unemployment insurance, which we assume will expire but which has at least a shot of extension as well. Dealing with these issues outside of the super committee would be possible but much more difficult. So while the deficit reduction that the super committee achieves will be the most important long-run factor, the outlook for 2012 also depends on whether these expiring provisions are extended. Thus any sign that the super committee can reach agreement–regardless of composition–is likely to increase the likelihood that some of these items will be renewed.