US Crisis Watch: Senate Dems Unveil $2.7 Tln Spending Cut Plan

Author: Market News International | Category: News

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

* Senate Democrats Monday unveiled a $2.7 trillion plan to cut
spending that includes large savings from domestic and defense programs
to try to end the stand-off over raising the debt ceiling. According to
news reports, the measure also includes $1.2 trillion in defense and
nondefense spending cuts. Other savings are $30 billion from Fannie Mae
and Freddie Mac, as well as $400 billion from lower interest payments.

* In a statement Monday, the White House said Senator Reid has
put forward “a responsible compromise” that cuts spending in a way that
protects critical investments and does not harm the economic recovery.
It removes the cloud of a possible default from our economy through
2012, the White House added. “Senator Reid’s plan is a reasonable
approach that should receive the support of both parties, and we hope
the House Republicans will agree to this plan … . The ball is in their

* House Speaker John Boehner briefed House Republicans in
Monday on his revised debt ceiling plan, which would raise the debt
ceiling by $1 trillion this year and $1.6 trillion next year. According
to a Boehner staffer, passing the initial $1 trillion debt ceiling
increase would require Congress to pass $1.2 trillion in spending cuts
through imposing caps on discretionary spending. Approval of the second
tranche of $1.6 trillion would require passage of $1.8 trillion in
spending cuts in entitlement programs. Under Boehner’s plan, the House
and Senate would also have to vote on a balanced budget constitutional
amendment between this October and the end of the year.

* It seems likely that Boehner will bring his debt hike plan to
the floor of the House this week where it is likely to be approved on a
party line vote. No Democrats are expected to vote for his plan and
Boehner may have to struggle to get the most conservative faction in his
caucus to support it.

* Insurance against a default on the USA tested the 18-1/2 month
wide Monday as worries about the inability of Washington lawmakers to
find a deficit reduction solution as well as a debt ceiling legislation.
Five-year CDS insurance on the USA hovered at 56.5 basis points, some 3
bps wider on the day. High volatility was seen in the credit as the
insurance traded within a 52.5 bps to 57.5 bps range. The move put
insurance on the USA just below last Monday’s 18-1/2 month wide of 61
bps. Since September 2009 the average for 5-year CDS on the USA has been
pegged at 42 bps.

* Amid continued uncertainty on when and how the White House and
Congress might strike a deal to raise the U.S. debt ceiling and agree on
a deficit reduction plan, the International Monetary Fund board stressed
the urgency of both, according a report Monday. A “downgrade would be
very damaging for both the U.S. economy and the rest of world,” Rodrigo
Valdes, senior advisor for the IMF’s Western Hemisphere Department, told
reporters in a conference call. The report notes that the U.S. has the
potential for “uniquely large policy spillovers … which directly
affect financial conditions abroad and seep into domestic activity
everywhere. These spillovers strengthen the case for clear communication
of U.S. policies and for better-defined medium-term fiscal policy

* Market analysts have begun to more seriously warn of the
consequences of a downgrade to the United States debt rating, which may
occur whether or not the U.S. debt ceiling is raised. Traders pointed to
an e-mail purportedly sent by well-respected PIMCO manager Mohamed
El-Erian that pointed to the “increasing risk that it (the U.S.) might
lose its sacred AAA rating.” “In most likelihood, a last-minute
political compromise will avoid a default, but will leave the AAA rating
extremely vulnerable,” he said.

* Investment-grade corporate debt issuance slowed to a crawl on
the dollar-denominated new bond offerings calendar Monday as
uncertainties over U.S. debt ceiling/budget deficit negotiations
overshadowed other global issues. With continued uncertainties over a
resolution to U.S. debt ceiling/budget deficit negotiations in the
forefront of most bond investors minds Monday, the tone in the credit
market turned a bit more sour from the optimism seen last week.

–Editor: Brai Odion-Esene;

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

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