With fewer than 10 hours before a government shutdown deadline, the Senate passed a continuing resolution late Monday, kicking responsibility back to the House to avert a government funding crisis.
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In a lightning-fast vote of 54 to 46, the Democratic-controlled Senate stripped language from an earlier House-passed bill that would delay President Barack Obama’s Affordable Care Act by one year, and repeal the medical device tax. What’s left is a “clean” stop-gap funding proposal the Senate will now punt back to the House in an effort to avoid hitting the midnight deadline to avert a shutdown.
Earlier Monday, President Barack Obama, in a press conference, said he was “not at all resigned to” a government shutdown, and looked forward to working with Congressional leaders on a reasonable compromise.
It’s still to be seen what exactly the Republican-controlled House plans to do with the Senate’s latest proposal. House GOP leadership is reportedly looking at potentially three options to counter-propose the Senate, but it’s ruled out an interim CR that would carry the government through only a few days.
Reid also threw cold water on the concept of a short-term CR, responding dryly “yes” when asked if he was dead-set against a one-week stopgap.
In a press conference following the Senate's vote, Reid asked House Speaker John Boehner to stop playing politics with the shutdown threat.
"I have a very simple message to John Boehner: Let the house vote. Stop trying to force a government shutdown," he said.
Still, according to House sources, the Republican-controlled body might have another idea in its back pocket. Immediately following the Senate's passage of the CR, House GOP leaders responded immediately with a potential plan of action. Rep. Darrell Issa said the House's plan, which, presumably it would pass later Monday evening and send to the Senate, will include a one-year delay of the ACA's individual mandate, and an inclusion of the Vitter amendment. But the brave plan could face a hurdle in the Rules Committee meeting and might not make it to the floor for a vote.
The House Rules Committee is expected to convene around 4:00 p.m. ET to prep action on their new counterproposal.
Despite Republican’s best efforts, the Senate and the president have vowed to strike down any legislation including action on the ACA.
Markets Worry About Shutdown Effects
Though the Senate and the president believe a government shutdown isn’t all but guaranteed at this point, market participants on Wall Street have a different idea.
In a note to clients Monday, the Potomac Research Group said it doesn’t see any signs of reconciliation on the horizon, and a government shutdown is highly likely for the first time in 17 years.
“We held out hope that a short-term continuing resolution would pass by midnight tonight, but that now looks far-fetched. None of the key players will blink anytime soon, so this could last for a while. For the markets, a state of exceptional uncertainty will persist for at least another month, possibly until late December,” the Washington-based consultancy wrote.
But Todd Schoenberger, managing partner at LandColt Capital in New York said a shutdown will not happen – but the fear is sending shock through the markets – with the Dow down about 100 points in mid-day action.
“We've been through too many of these end-of-world crises, only to hear about a resolution being delivered in the final hours. Sadly, Congress continues to discredit itself by playing these political games and negotiating via media interviews rather than face-to-face when it pushes the country to the brink,” Schoenberger said.
If the shutdown becomes reality, the consequences the U.S faces are somewhat uncertain.
“Much of the government spending that has a direct effect on the economy – such as entitlement programs like Social Security and Medicare, as well as existing government contracts for constructions projects and purchases of weapons systems – will not be affected by a shutdown. Government employees who are temporarily furloughed may cut back their spending, and business and consumer confidence may be adversely affected,” Nomura outlined in its note to clients.
In a note to clients Monday morning, Peter Boockvar, managing director and chief market analyst for The Lindsey Group said previous government shutdowns have had little impact on U.S. equity markets, using the most recent as an example. In that case, a temporary fix ended the shutdown, and markets ended little changed from the first day to the last.
“Of course the circumstances are much different today in many ways but markets should assume that a deal will come sooner rather than later because the negative consequences get too large the longer this all lasts, particularly with the debt ceiling,” he wrote.
The bigger concern is a hit to the nation’s economy if and how long a shutdown happens. Michael Block, Chief Strategist at Rhino Trading Partners said in a note to clients Monday, he expects a shutdown to shave up to 1.4 percentage points off fourth-quarter gross domestic product.
“Perhaps more important, failure to reach a compromise here will damage the credibility of the U.S. political system even more acutely than recent shenanigans have already,” he wrote.
Next Congressional Battle
September 30 is not the only deadline Investors and market participants are keeping their eyes focused on. A much bigger concern is the debt ceiling deadline on October 17 – on that day, the U.S. Treasury Department has said it will max out its “extraordinary measures” to fund the government’s financial obligations. At that point, conceivably, the United States will, for the first time in history, begin to default on its obligations, which could ignite massive backlash in financial markets and even spark ratings services to downgrade U.S sovereign debt. And that has market participants worried.
What’s making analysts nervous is the complete inability of Congressional leaders to work out a compromise on the CR. If lawmakers are unable to come together on even a funding proposal through the end of the year, does that bode well for the negotiations sure to come on increasing the nation’s debt ceiling?
“The consequences of the debt limit becoming binding are potentially much more severe. Arrears on some government obligations would probably be unavoidable, and Treasury officials have indicated that they see no clear way to avoid arrears on debt service obligations if the debt limit becomes truly binding,” Nomura wrote.
Block added, “Failure to pass (the debt ceiling resolution) would cause much bigger potential issues and not being able to resolve this issue first will not help investors’ confidence,” Block wrote. “Some pundits do think that a government shutdown will be good for markets because it will make Congress see how urgent and dire it is that they resolve the debt ceiling crisis.”