Debt Negotiations Update: August 2nd May Not Be Doomsday After All

Just as we thought doomsday was upon us, it now looks as though a failure to pass legislation by next week’s deadline will not mean a default on US sovereign debt (NYSE:TLT). The Obama administration and Treasury Sec. Tim Geithner had warned repeatedly that the nation would default on its treasury debts if legislators failed to approve a bill that includes spending cuts and lifts the federal debt ceiling by Aug. 2nd, though now the talk in the oval office seems to be changing.

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Today multiple sources reported that Pres. Obama has been providing “guidance” to major US banks regarding the likely outcome of the legislature’s failure to reach an agreement by the deadline, telling them that a default is unlikely in such an event. However, the administration warned that debt downgrades from major ratings agencies Moody’s (NYSE:MCO) and Standard and Poor’s would be likely. According to a senior banking official, “They [Obama Admin] also know they can pay the debt with cash on hand,” adding that a downgrade “is a real possibility for no other reason than S&P and Moody’s have to cover (themselves) since they’ve been speaking out on the debt cap so much.”

Why the change in outlook? According to Barclays (NYSE:BCS) Capital Analysts, the Treasury Dept. took in much more cash in tax revenues that it projected in July.”This suggests that the date on which the Treasury will run out of cash to pay its obligations might not be August 2; it might be around August 10 instead.”

Another week may not prove to be time enough for an increasingly acrimonious rhetoric in Congressional talks that has opened a fault straight down the political lines. Today there are reports of two new debt plans circulating on the hill, one proposed by House Speaker John Boehner, and the other by Senate Majority Leader Harry Reid. Boehner’s plan seeks short term spending cuts of $3 trillion and would raise the debt ceiling by $2.8 trillion in a two phase process. Reid’s plan would authorize a debt ceiling hike of $2.4 trillion with spending cuts of $2.7 trillion attached. The Reid plan would derive most of its savings from cuts in military spending and savings on interest payments, while the Boehner Plan would cut costs by scrapping over $3 trillion in discretionary spending and entitlements.

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President Obama has reportedly relinquished his leadership role in brokering a deal as this weekend the chief executive failed once again to assuage Republican leadership to agree to a proposal that included tax increases. The White House has issued a statement in support of the Reid plan, which is headed to the floor for a vote later tonight.