As highlighted in a recent Citi research note, if partisan gridlock drives concern about resolving the so-called fiscal cliff, then it should similarly raise concern as U.S. borrowing closes in on the Federal debt ceiling, likely around the start of the new year. It is widely understood that the U.S. Treasury could delay the need for imminent action for a few months once the debt ceiling is hit. It could then avoid debt default even if the ceiling is not raised, but not without cuts of over 40% to Federal spending – a roughly 8% static drag on U.S. GDP – mitigated only by potential tax revenue increases from the “cliff.” The catastrophe that an unresolved debt ceiling would represent drives the widespread assumption that a bipartisan deal to raise it will once again be made. So if this is the case, then other fiscal agreements would seem more plausible too.  Amid continued if somewhat diminished concerns that the fiscal cliff will be allowed to occur, resolving the debt ceiling by late in 1Q 2013 would seem a reasonable deadline for reversing or mitigating “cliff” impact.

The likelihood of a deal to avoid the fiscal cliff in late 2012 (to allow for wider agreements next year) remains unclear and depends on full Presidential and Congressional election results. Most continue to expect such action, but also believe that a failure to address the cliff before year end would result in considerable financial market turmoil in all but some special circumstances. Like two cases within the past few years, policymakers who would prefer not to act could be swayed by markets and other public pressures. Politico continues, “In one day, Treasury Secretary Timothy Geithner met with both House Speaker John Boehner (R-Ohio) and House Ways and Means Chairman Dave Camp (R-Mich.). The meeting with Camp was directly focused on the year-end expiration of tax rates — widely known in Washington as the “fiscal cliff.” Boehner’s office said he and Geithner spoke about the European debt crisis, but it declined to answer whether tax rates were discussed…”