Obama: 'Good Chance' of Default, Some Senate Progress

By FOXBusiness

Talking to reporters at an event in Washington D.C. Monday, President Obama said the U.S. faces "a good chance at defaulting."

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“This week if we don’t start making some real progress, both the House and the Senate, and if Republicans aren’t willing to set aside their partisan concerns in order to do what’s right for the country, we stand a good chance of defaulting. And defaulting could have a potentially have a devastating affect on our economy," the president said.

The U.S. is officially in day 14 of the partial government shutdown, and just three days from exceeding the Treasury Department’s borrowing authority. And still, there’s no solution in sight to deal with the pair of fiscal crises.

After signs of progress Friday following two days of talks at the White House involving both Republicans and Democrats, talks stalled Sunday. Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell spoke briefly on the phone, resulting in “cordial but inconclusive” discussions. In the end, they agreed to “keep talking,” according to a Senate Democratic leadership aid.

Perhaps worse, on Sunday, after talks between President Barack Obama and the House stalled, the Senate rejected a proposal by Sens. Susan Collins and Joe Manchin to raise the debt ceiling through Jan. 31 and re-open the government at the $967 billion sequester-imposed funding level through March. Democrats are looking for a longer debt extension and desire to replace 2014 sequester-imposed spending cuts that are set to go into effect in mid-January.

Adding to the already large mountain of discontent, Reid threw a curve ball when he proposed killing the 2014 sequester – a nonstarter for Republicans who won’t agree to more spending without any kind of budget cuts.

Reid wasn’t the only one playing high-stakes baseball. On the other side of the aisle, Collins pitched legislation that would allow current spending levels to remain until March and raise the debt ceiling until January. However, there’s a catch: the deal would also delay the medical device tax – a key component of ObamaCare – and certain anti-fraud measures, for two years. Democrats have signaled an unwillingness to modify major components of the president’s signature health-care law, so that proposal struck out.

If all else fails, Reid may have one other choice: the nuclear option. Fox News producer Chad Pergram reports there is talk of altering Senate rules that enable senators to filibuster legislation – a strategy Republicans could use to upend Democrat legislation in that body. House Speaker John Boehner has said in the past his house won’t pass any legislation that passes that way.

Still, Reid said Monday on the Senate floor, he's "optimistic" about a "positive conclusion" to the fiscal impasse by the end of the day. Reid, Senate Minority Leader Mitch McConnell, House Speaker John Boehner, and House Minority Leader Nancy Pelosi are set to meet with the president and vice president at the White House Monday at 3 p.m. ET to hash out a potential deal on the debt limit and the partial government shutdown.

Wall Street: Anxious, But Not Downright Frightened

Though it seems there’s not an ounce of compromise to be found in Washington, Stephen A. Myrow, managing director at ACG Analytics says there’s still hope.

“It has taken two weeks, but the shutdown has become a battle over the issue that typically causes a shutdown -- spending -- instead of other high-profile, topics such as Obamacare.  Treasury Secretary Jacob Lew's Thursday, October 17th debt limit deadline is finally the action-forcing mechanism that will assure an agreement gets reached, passed and signed into law within the next 96 hours,” Myrow wrote on Monday.

In a note to clients Monday, Goldman Sachs said the easiest thing to get both parties to coalesce around might be a two or three month deal, if a longer-term agreement can’t be reached.

“This would allow congressional leaders to sidestep the sequestration issue in this round of talks, since the cuts do not take effect until around January 15, 2014. In the interim, Congress would then try to replace some of the cuts under sequestration with other sources of budgetary saving spread over ten years,” the investment bank said.

The bank said it still expects a deal to emerge within the next few days, but cautioned a compromise coming after the Oct. 17 drop-dead date issued by Treasury isn’t out of the realm of possibility.

“If a bipartisan deal is reached in the Senate, getting the bill through the House would still be a tricky proposition and Republican leaders may not want to put such a bill to a vote until other options have been exhausted,” the New York-based bank wrote.

It also reiterated the mid-week deadline wouldn’t actually be a date on which the U.S. would begin to default on its obligations. Instead, Goldman said Treasury will have just about $30 billion of cash on hand at that point, which it could use to finance debt for “several more days, and perhaps longer.”

Sharing in the cautious optimism, Wall Street traders, investors, and analysts don’t seem to be too pessimistic about the ongoing lack of progress on Capitol Hill. At the opening bell, U.S. equities sold off – the Dow briefly fell 100 points – before settling out and pairing back losses. That comes on the back of a rally at the end of last week.

Greg Valliere, chief political strategist at the Potomac Research Group, said in a note to clients on Monday, the threat of default dissipated last week and that’s not so much what traders are focused on this week – instead it’s another worry facing Wall Street.

“It's the likelihood that a deal late this week will simply kick the can down the road, setting up still another shutdown crisis later this fall, then another during the winter, then another in the spring.  This will do real damage to the economy -- business and consumer psychology will slump even further amid this persistent and corrosive uncertainty,” he wrote.

Valliere expects a deal to emerge late Wednesday, but warns conservative efforts to reject an unpalatable deal from the Senate at the eleventh hour shouldn’t be underestimated.

While Wall Street remains only somewhat concerned about a debt deal, bond markets remain deeply worried about a possible debt ceiling breach and potential default. Concerned senior Treasury officials met Sunday to discuss market reaction to debt negotiations – or lack thereof. Notably, bond markets were closed Monday for the Columbus Day holiday, so it is difficult to gauge the reaction to inaction this weekend.

Peter Boockvar, chief equity strategist at The Lindsey Group, said Monday most finance ministers at the G-20 meeting over the weekend believe some kind of deal will emerge before the Oct. 17 deadline but still, concerns remain.

“We must watch for the longer term implications on our bond market from the perspective of foreigners who own half our debt. The same level of appetite is unlikely to be there and we’ve already seen early evidence of that in both the weak action in the U.S. dollar and the amount of bonds foreigners have purchased this year,” he wrote.

Citigroup warned forebodingly on Friday that even if a debt deal does come before the borrowing authority lapses, the damage to the U.S. economy could already be done, impacting the Fed’s desire to begin tapering QE3.

And Barclays analysts Koon Chow and Guillermo Felices on Monday affirmed that viewpoint. The investment bank said it foresees the $85-billion-per-month bond-buying program to continue through December, while the more bearish Citi forecast calls for QE through March.

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