National Debt Limit Debate Delayed Due to Fannie Mae Loan Repayment

Fannie Mae (the Federal National Mortgage Association) announced yesterday that they will make a $59.4 billion payment to the U.S. Treasury as a partial repayment of the roughly $116 billion in loans they received after the financial crisis of 2008/9.  They cited an increase in cash flow due to a one-time accounting change that will save them money on their taxes and the recovering real estate/mortgage market as reasons for the increased cash flow.  This payment will allow the U.S. government to forestall the debate on the debt ceiling, which we will hit on May 18th when the extension period runs out, voted in by Congress at the end of 2012 as a result of the Fiscal Cliff debate.

Although the Fannie Mae payment will delay the need to raise the debt ceiling by about 3 months, Congress will be forced to once again debate the conditions surrounding raising the debt limit.  Republicans have typically required offsetting cuts in spending, while Democrats have favored increases in tax revenues.  Unfortunately, Congress is likely to put-off the debate until the last minute, once again, which is certain to cause a lot of anxiety, especially within financial markets.  At the last debt ceiling debate, in the summer of 2011, the stock market dropped 30% as a result of the bickering.  The fight this time over raising the debt ceiling could certainly spark a sizable correction in the stock market, especially given the current lofty levels for the major indexes and stock valuations in general.  Of course this is assuming we haven’t already had a correction before Congress takes up the issue towards the end of summer.

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