Market Mover - BNP PARIBAS - Investment Services India

US: The Fiscal Clock is Ticking…• The Supercommittee in charge of proposinga USD 1.2trn fiscal deficit reduction plan by 23November is “running short on time”, accordingto one of the Supercommittee’s co-chairs.• Wednesday, Democrats on the Committeesubmitted a USD 3bn deficit reduction plan thatwas quickly shot down by Republicans due to itsheavy reliance on tax increases.• If the Supercommittee does not come upwith a plan in time, then it could risk anotherratings downgrade.• We are cautiously optimistic that theSupercommittee will come forward with abipartisan proposal that will be approved byCongress and signed into law.420-2-4-6-8-10-12Chart 1: Federal Deficit: BNP Paribas vs CBO(% of GDP)1992 1997 2002 2007 2012 2017Source: Haver Analytics, CBO, BNP ParibasForecast -->CBOBNP ParibasChart 2: Federal Government Debt (% of GDP)• As battles in Congress drag on, PresidentObama is now turning to his executive powers toprovide stimulus.1059585Forecast -->Time is not on their sideThe Supercommittee in charge of proposing a USD1.2trn fiscal deficit reduction plan by 23 November is“running short on time”, according to one of theSupercommittee’s co-chairs. In fact, a plan, whichwill need to be run by the CBO for official “scoring”,or unbiased measuring, will need to be submitted tothe CBO a few days prior to the 23 Novemberdeadline in order to allow adequate time for thescoring. However, the parties still appear to be a longway from an agreement.Democrats move firstOn Wednesday, Democrats on the Committeesubmitted a USD 3bn deficit reduction plan thatlargely mirrored President Obama’s “Grand Bargain”which was debated this summer. Republicans werequick to refute this proposal as it included asignificant tax increase component. Disagreementsover tax increases continue to hinder negotiations,and we foresee that it will take some compromisefrom Republicans in order to get a deal done. TheDemocrats do not believe that they can give in onthis; otherwise, Republicans are likely to get fullcredit for the deficit reduction. Nevertheless, theRepublicans have some room to eliminate some taxloopholes, which would not actually raise the taxrate, allowing both parties to claim victory.75655545352008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Source: Haver Analytics, BNP ParibasRisking another downgradeAs we have written before, coming up with USD1.2trn in deficit reduction is not the difficult part. Thedifficulty is striking an agreement that allows bothparties to claim credit for any deal as we enter anelection year. If the Supercommittee does not comeup with a plan before the deadline, then it could riskanother ratings downgrade. We see two likelyscenarios: i/ the Supercommittee puts together apackage which is approved by Congress by 23December, Republican’ compromise and everyoneclaims victory; or, ii/ the Supercommittee cannotcome to a compromise over taxes and the plan fails.If the second outcome is the case, Congress still hasanother year before the forced sequestration wouldtake effect. Thus, Congress would have time to enactUSD 1.2trn worth of deficit reduction after theelections and before the sequestration takes effect,although this added time could come at the cost of aFitch or Moody’s downgrade (see Box 1).Bricklin Dwyer 27 October 2011Market Mover10www.GlobalMarkets.bnpparibas.com