The Debt Ceiling Crisis Is Averted -- Now What?

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If it seems like we've been here before, we have. In fact, we've been in this debt-ceiling-raising situation 78 -- yes, seventy-eight -- times since 1960. Once again, disaster appears to have been averted, and both political parties grimaced enough to essentially agree on a spending-cut bill, which will cut at least $2.2 trillion out of the U.S. budget over the next decade.

The skinny
The bill, which is set to go to vote sometime today, is staggered into two stages. The first stage would go into effect immediately, calling for more than $900 billion in spending cuts on federal programs with a $900 billion increase in the U.S. Treasury's borrowing ability.

The second stage involves creating a joint committee of Congress that would recommend up to $1.5 trillion in deficit reductions by November. If by then the committee can't come to a deal as to what form that reduction should take, automatic spending cuts would be applied across all government agencies to the tune of $1.2 trillion. If the past few weeks have been any indication as to how poorly our two political parties interact, I'm not entirely optimistic we'll see the maximum deficit reduction from this bill.

If the automatic spending cuts were to trigger in November, Social Security, Medicaid, and veterans' benefits would stay unaffected. In addition, as the bill stands now, there are no provisions for tax increases unless the joint committee recommends one.

Bloodshed in health care
But the money has to come from somewhere if these automatic spending cuts were to kick in. The areas this bill could put at risk include payments to doctors, nursing homes, Medicare providers, and insurance companies that offer alternatives to government-run Medicare. However, the jury is still out on exactly how these spending cuts may materialize.

A few names to watch that could react negatively to this news and may see their revenue stream at risk include Aetna (NYSE: AET  ) , WellPoint (NYSE: WLP  ) , and Express Scripts (Nasdaq: ESRX  ) in health-care plans, as well as Kindred Healthcare (NYSE: KND  ) and Sun Healthcare Group (Nasdaq: SUNH  ) in the nursing sector.

This news hits particularly hard on the latter two companies, especially considering that news broke after the bell Friday that Medicare payments would be cut by nearly $3.9 billion out of nursing home payments in 2012. This 11.1% cut in payments rectifies the larger-than-necessary reimbursements these companies received from patients this year. Shareholders of these stocks have to be concerned since these companies are moderately to heavily dependent on Medicare payments to buoy revenue. But many other sectors will feel relatively minimal effects from this bill.

Uncle Sam needs you now more than ever
Other than taking health-care companies to the woodshed, this debt deal also marks a genuine move toward American austerity. Greece, Ireland, and now Portugal, have recently implemented extreme measures -- usually large tax hikes and big government spending cuts -- to counteract unsustainable debt levels in relation to their annual GDP. Although we have a very short timeframe to work with, we've also witnessed how brutally unsuccessful those reforms have been thus far. For example, Greece recently had to come crawling back to the European Central Bank, requesting its second bailout in a year.

This leaves the U.S. at one of the biggest catch-22s in its history: Do we reduce government spending when economic growth has slowed to its lowest levels since the economy exited the recession in 2009, or do we blindly spend with little regard to controlling our outstanding debt?

I really don't have the answer, but based on what members of Congress had to say about this deficit reduction package, I don't think they know, either. In the words of House Speaker John Boehner, "It isn't the greatest deal in the world."

A ham sandwich
Lawmakers simply did what they had to do -- compromise to raise the debt ceiling and avert a looming credit default by any means necessary, and today's bill was a testament to that. Neither party seems very enthused with the end result other than that we seem to have averted a financial meltdown yet again.

What I'm not so sure about is if the U.S. has avoided the dreaded credit downgrade even with passage of this legislation. Credit-rating agencies like Moody's (NYSE: MCO  ) are taking into account not only the credit worthiness of the U.S. but also its ability to repay its debt obligations given the strength of the economy and its debt as a percentage of GDP. The American economy has stalled, and debt levels aren't scheduled to fall anytime soon. Not only do I feel the U.S. isn't out of the woods yet -- I don't think we've even found the trail!

Fellow Fool Matt Koppenheffer argued last week that a U.S. debt downgrade could be a reason to hyperventilate. Whether that's the case and bond rates spike higher or level off, a debt downgrade probably represents a more realistic picture of the current state of the U.S. debt situation, and I agree with Matt that a debt downgrade even with this bill's passage is still highly likely.

What's your take on this debt deal? Does it put the U.S. back on the right track, or was this simply two ideological views slapped together at the last minute with little direction? I'd love to hear your responses below.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. Motley Fool newsletter services have recommended buying shares of WellPoint and Moody's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that has bipartisan support.

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  • Report this Comment On August 01, 2011, at 12:00 PM, taralbharatia wrote:

    One possible solution regarding debt crisis is privatizing the vast amount of Federal assets all over the country such as Federal land, Transportation sector which is behind other Developed countries due to lack of funds OR Mortgage some of the gold sitting in FORT Knox. As recently the gold is in demand all over the world thanks to devalued DOLLARS, our govt would not have any problem mortgaging it.

  • Report this Comment On August 01, 2011, at 4:30 PM, plange01 wrote:


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