Wall Street: Don't Play Games with Debt Ceiling

The Hill reports:

Wall Street is getting used to high drama in Congress, but the fight over raising the debt limit will test even that seasoned resolve.

If Wall Street saw the fight over legislation to fund the government as playing with matches, it sees the fight over the debt ceiling as playing with plastic explosives, said Steve Bell, a former staff director with the Senate Budget Committee.

Bell, who is now at the Bipartisan Policy Center, said his group’s scholars have heard from the heads of large Wall Street financial institutions worried that the last-minute nature of the talks on the spending measure foreshadows the debate on the debt ceiling.

“They said that Congress better not think they can play the same shenanigans with the debt ceiling,” Bell said.

Fresh from last week’s deal, lawmakers are turning to the fight over raising the $14.3 trillion debt limit. Republicans say the administration must agree to steep spending cuts to win their support to raise the ceiling by a May 16 deadline set by the Treasury Department.

The administration is demanding a clean bill, but likely realizes it will need to agree to some spending cuts to win a hike in the debt ceiling.

Financial markets already are watching closely.

“What markets typically dislike the most is uncertainty,” said Douglas Holtz-Eakin, the president of the American Action Forum and former director of the Congressional Budget Office. “The more it drags out, the greater that impact will be, and that’s not a good thing.”

Wall Street comes to the debate with the experience of the financial crisis.

“Investors have been conditioned to expect drama,” said Brian Gardner, the senior vice president of Washington research at Keefe, Bruyette & Woods. Thanks to the financial crisis, Wall Street’s understanding of D.C.’s machinations, including political theater, is at “an all-time high.”

Wall Street got a taste of the drama Capitol Hill can serve on Sept. 29, 2008, when the House voted down the Troubled Asset Relief Program (TARP) in the midst of the financial crisis. The Dow Jones Industrial Average responded by dropping over 700 points.

The plunging markets unnerved lawmakers, and the bailout program was passed by Congress days later.

Bell said people on Wall Street are saying that a failed debt-ceiling vote on the House floor would be like the first failed vote on TARP — only worse.

“I think you would have a similar reaction in the bond market and — most people don’t realize this — the bond market is an order of magnitude bigger than the equities market,” he said.