What Would It Take to End Stalemate

“Congress is often referred to as a reactive force rather than a proactive one,” said Tobias Levkovich, chief United States equity strategist at Citigroup. “If we had a 500-point drop in the Dow, it would scare that reactive body.”

With House and Senate debt limit proposals set to collide on Capitol Hill, Wall Street was anxiously awaiting the opening of Asian markets on Sunday night in the absence of a compromise by lawmakers.

Investors expressed their displeasure Friday with both the political stalemate and new economic data that showed the economy grew at a slower-than-expected pace in the second quarter.

The Dow Jones industrial average, which has retreated for six consecutive trading days, was down 96.87 points, or 0.79 percent, to 12,143.24. The Standard Poor’s 500-stock index, a broader measure of the market, lost 8.39 points, or 0.65 percent, to 1,292.28. The Nasdaq composite index fell 9.87 points, or 0.36 percent, to 2,756.38.

The S. P. was down 3.9 percent this week, the biggest weekly drop in more than a year. The last time the broader market closed lower for three consecutive months was in 2008, for the months of September, October and November. That was also the last time Washington surprised investors and failed to act.

On Sept. 29, 2008, lawmakers rejected the TARP legislation to bail out the banking system at the height of the financial crisis after the collapse of Lehman Brothers and investors sent the Dow plunging by 778 points.

Congress quickly reversed course, and by Oct. 3, both the Senate and the House had approved the legislation. But the damage had been done — that 778-point drop wiped out $1 trillion in shareholder value. And with investors unnerved, the stage had been set for more big drops. The Dow fell 936 points on Oct. 13 and another 889 points on Oct. 28.

“In sum, Washington grumbles, Wall Street stumbles,” said Sam Stovall, chief investment strategist for Standard Poor’s equity research in New York. “Once again, history repeats itself.”

So far, Wall Street isn’t yet in panic mode over the wrangling in Congress over government spending and whether to lift the nation’s borrowing limit of $14.3 trillion by a Tuesday deadline. Without the ability to sell more debt through United States Treasuries, administration officials have said the government will not be able to pay all of its obligations and risks a downgrade in its credit or even a default.

Mr. Levkovich said Friday that most investors were still counting on a resolution to the logjam, averting a default. But, he said, “the level of complacency is eroding. I suspect there will be a lot of frantic calls going around this weekend.”

Though the bond markets have shown considerable nonchalance during the stalemate, signs of distress emerged this week. The yield on the benchmark 10-year Treasury bond fell to 2.79 percent, its lowest level since November. Federal officials held an unusual meeting with senior traders at 20 major Wall Street firms to discuss the government’s contingency plans to keep refinancing its debt.

Federal officials signaled a possible delay next week in the government debt auctions when they solicited feedback from the Wall Street firms that bid for allotments of Treasury securities. At Friday’s meeting at the Federal Reserve Bank of New York, senior Treasury Department officials laid out three proposals that would allow the government to keep refinancing its existing obligations while keeping it under the $14.3 trillion cap, according to two dealers who were briefed on the meeting. The Treasury has about $90 billion of debt that comes due on Aug. 4, and another $410 billion or so in the next few weeks.

One plan calls for a delay in some debt sales until lawmakers reach an agreement on the debt ceiling. Another would reduce the size of the sales. The third option would be to shorten the timetable in which they refinance the debt by selling very short-term bills. The government took similar action in 1995 when Congress briefly ran close to the debt ceiling deadline. But it is the equivalent of living paycheck-to-paycheck.

Azam Ahmed, Eric Dash and Patrick Scott contributed reporting.

Article source: http://www.nytimes.com/2011/07/30/business/wall-street-holds-its-breath-during-debt-talks.html?partner=rss&emc=rss