Just a few days more of this debt ceiling (R. Narvas)

Just a few days more of this debt ceiling

The clock continues to tick towards the Treasury's August 2 deadline and we continue to see little progress towards an agreement to raise the debt ceiling. The parties continue to be firmly dug into partisan lines, although the Republicans are looking more fractured. If no deal is done, there is the option of adopting the Reid-McConnell plan proposed last week, but also the atomic bomb of the President invoking the 14th amendment. In the case of a downgrade or default, it seems that the majority of Treasury holders may not be forced sellers. That said, repo markets are already dislocated due to the debt crisis, as players build up cash reserves, preparing for the worst.

Bracing for impact: The economic fallout from the US debt crisis

One of our key concerns surrounding the debt ceiling debacle is that it could spread beyond August 2. Early evidence suggests that the crisis is already inflicting economic damage, and prolonging the uncertainty will only exacerbate the problem. We assess the potential damage below.

Greek brainteaser solved

Details posted by the EU Commission yesterday proved in line with our expectations and very encouragingly showed that the euro area leaders have included a significant “buffer” in the event that the PSI falls short of the 90% participation rate. Assuming that the Greek banks do require the €20bn set aside from recapitalisation, the plan has scope to deal with both significantly lower PSI participation rates and/or lower privatisation receipts.
While the new details are clearly very welcome, hurdles still remain. First, the new EFSF structure still needs to be ratified by national parliaments. Second, Greece needs to deliver on the targets set out. Questions, moreover, remain unanswered, and notably how the EFSF bond buyback facility in secondary market will work.

In the news

EURO AREA
Money and credit weak in June, but after a surge in May

CZECH REPUBLIC
The time for higher rates has probably not come yet

GERMANY
Unexpectedly strong inflation pressures in July

Preview: Germany June unemployment
Downtrend in German unemployment to re-accelerate

Preview: European Commission survey
Economic sentiment to edge higher

UNITED STATES
Durable goods orders: saw-toothed pattern continues

UNITED STATES
More soft patch evidence

Preview: US June pending home sales
Pending home purchases likely climbed in June

MEXICO
Activity picks up but US outlook still weighs

Preview: Brazil COPOM minutes
Brazil COPOM minutes to provide guidance on imminent rate pause

SOUTH KOREA
A moderate growth slowdown, but not enough to cool the inflation

AUSTRALIA
Higher than expected Q2 inflation reminds where RBA's policy bias lies

Preview: Reserve Bank of New Zealand meeting
Policy hike not yet, but getting close

Preview: Japan June retail sales
Japanese consumers complete the V-shaped recovery in June

Preview: Hong Kong June merchandise trade
Mixed China trade suggests a flat June for Hong Kong