The Committee for a Responsible Federal Budget valiantly continues to make the case for “going big” in the fiscal negotiations. I fear their argument is falling on deaf ears:  the window for a fiscal bargain–grand, bland or otherwise–that deals with our long-term fiscal challenge is closing.  The upcoming sequester battle provides one last opportunity to make such a deal.  Yet both Republicans and Democrats say that they are prepared to allow the sequester to take effect on March 1, at least for a while, and they seem to mean it.  A deal that addresses longer term debt sustainability and at least partly restores the sequester cuts remains possible, though unlikely, as part of the continuing resolution (CR) to fund the government from March 28.  That’s the real deadline.

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Reports from the House Republican’s Williamsburg retreat suggest growing momentum in favor of a short-term debt limit extension.  This follows calls over the past few days from several prominent Republicans to raise the debt limit, and soon.  This is good news for markets but not an end to fiscal uncertainty, as the battle shifts to the dual cliffs of the sequester and the continuing resolution (CR) funding the government after March 27.  The odds of a government shutdown in the absence of a CR, at least for a few days, are high.

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Politico last night highlighted a scenario that has become my ‘base case’: a short-term debt limit extension followed by a government shutdown at the end of March.  This consolidates the three cliffs–debt limit, sequester, and continuing resolution–into one larger showdown that, hopefully, produces an agreement some time in April.

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The Financial Times  has joined the chorus of those calling for a new statutory sovereign debt restructuring mechanism (SDRM), citing Argentina’s legal battle with holdout creditors as evidence of a broken system for restructuring sovereign debt.  The SDRM, as most commonly understood, envisages a formal restructuring process, analogous to national bankruptcy law, to deal with the debt of distressed countries.   It was an impractical and unnecessary idea when first raised by the IMF in 2001, and it remains so today.

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The Bipartisan Policy Center today has produced a package of charts on the debt limit. Their bottom line isn’t shocking, but it’s persuasively laid out: Read more »

Tuesday’s fiscal agreement defuses the fiscal cliff by deferring most tax hikes and pushing back the sequester.  A deal has been made, a financial crash avoided, and near-term growth prospects look rosier.  Markets have cheered news of the agreement.

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