WASHINGTON (MNI) – The following is a roundup of key developments
and events Thursday on the ongoing stand-off over the U.S. debt
ceiling:

* Like the proverbial tip of the iceberg, the fierce public
debate and the coming congressional votes Thursday on House Speaker John
Boehner’s revised debt limit plan represent just a small part of all
that is happening on Capitol Hill to pass debt ceiling legislation.
While sharply partisan debates are occurring on the floors of the House
and Senate now, in many ways these talk fasts are mere sideshows. Far
more consequential are the private talks that are said to be occurring
between Vice President Biden and Senate Minority Leader Mitch McConnell
on what kind of package could clear both the House and Senate this
weekend or very early next week — and secure President Obama’s
signature.

* Insurance against a default on the U.S. for 5-years moved to
the most expensive level on record Thursday amid an ongoing stalemate
over the U.S. budget deficit reduction solution and debt ceiling
legislation. With a stalemate ongoing in Washington, credit default swap
insurance on the U.S. rose to an all time wide of 64.896 basis points,
in early afternoon trade. The move put the insurance 3.096 bps wider on
the day.

* As the August 2 deadline to raise the federal debt ceiling
draws nearer, the U.S. government will make clear the plans it has in
place to operate if Congress does not increase its borrowing authority,
a U.S. Treasury official told Market News International Thursday. This
as a White House spokesman told reporters that although a “grand
bargain” on the debt limit and deficit reduction remains on the table,
the chances of a sweeping deal being reached before Aug. 2 “aren’t
great.”

* House Speaker John Boehner said Thursday the raging dispute
surrounding the debt ceiling could end if the Senate takes up his
proposed legislation. Boehner called his bill “reasonable, responsible”
legislation, adding that it is “as large a step as we are able to take
at this time” to deal with budget deficits.

* Richmond Federal Reserve Bank President Jeffrey Lacker said
Thursday he is “cautiously optimistic” government leaders will avoid a
big “hassle” of defaulting on U.S. debt. Responding to questions
following a speech to the Dulles Regional Chamber of Commerce, Lacker
said the fighting over the debt limit is taking attention away from the
critical issue of the fiscal situation. But asked by reporters about the
more practical impact, Lacker said, “We might need to reevaluate the
discount window haircuts on Treasury securities if that’s warranted.”

* While not taking sides in the debt-limit debate, San Francisco
Federal Reserve Bank President John Williams Thursday warned, “A federal
default must be avoided.” The current uncertainty about how soon the
debt limit will be raised is “likely damping consumer and business
confidence,” he said.

* In the agency bond market, Fannie Mae Tursday announced that
it would not issue a Benchmark Note, which was widely expected to be the
case by most market sources. Sources have said that factors such as lack
of progress with respect to U.S. debt ceiling/budget deficit
negotiations, uncertainties looming over a possible U.S. sovereign
rating downgrade and recent volatilities in the agency bond market
contributed to Fannie Mae’s decision.

* Sources noted that recent agency bond trading activity has
been “volatile” with one veteran bond trader observing that most agency
bond traders have been in “disaster mode” this week. “People are
anticipating redemptions in money market funds” in the event of a U.S.
sovereign rating downgrade, one trader said.

* Senate Majority Leader Harry Reid Thursday said his office
“hand delivered” House Speaker John Boehner a letter yesterday saying
all 53 Senate Democrats are opposed to his debt hike bill and will vote
against it if the legislation passes the House. Reid touted his plan to
raise the debt limit, but also signalled he is open to altering it when
the debt ceiling debate shifts to the Senate.

* House Minority Leader Nancy Pelosi said Thursday that she
hopes bipartisan debt limit talks will resume after the House votes on
the Republican debt ceiling plan this evening. At a briefing, Pelosi
offered a scathing assessment of the House Republican debt ceiling plan,
calling it a draconian “ideological document” that would be a “job
killer” for the American economy.

* Senate Minority Leader Mitch McConnell blasted Senate
Democrats for threatening to block Boehner’s bill if it comes over from
the House. He said he is “shocked” by that threat. McConnell said the
only real sticking point between the two sides now is the Republican
insistence that there be a two-step debt ceiling increase process, with
a debt hike now and another one next year.

* Mexico’s Finance Minister Thursday said even if the United
States raises its debt ceiling, that might not stop credit rating
agencies from downgrading the country’s sovereign rating due to its
unbalanced budget. Ernesto Cordero also said if the debt ceiling is not
raised on time, financial markets around the world will experience
turbulence and very strong uncertainty, including in Mexican capital,
stock and exchange markets.

* In a statement Thursday, the Mortgage Bankers Association said
it is very concerned about the implications to the financial system of
the United States if the U.S. defaults on its debt. Warning the likely
impact to the financial markets, interest rates, and to every family in
America will be costly, the MBA implored policymakers “to act swiftly
and find a workable solution, given the short time left, to take this
step and not put the credit rating of the United States in jeopardy.”

–Editor: Brai Odion-Esene; besene@marketnews.com

** Market News International Washington Bureau: 202-371-2121 **

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