An agreement to raise the debt ceiling still appears to be some way off, but not for lack of trying. Every day seems to bring a new deficit reduction plan. With the clock ticking, we doubt there is time to reach agreement on a comprehensive plan. Instead, we expect a smaller scale plan to be passed that cuts $1.5trn from discretionary spending over the next decade. That might require us to cut, at most, a few tenths off our GDP forecasts, but it may not be enough to satisfy the rating agencies. The Federal government is therefore still likely to lose its AAA rating within the next three months.
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