WASHINGTON — House Majority Leader Kevin McCarthy’s sudden withdrawal Thursday from the race for Sspeaker rekindled Wall Street’s worries about a possible government shutdown.
Current Speaker of the House John Boehner’s announcement that he would step down at the end of October paved the way for a short term continuing resolution, or CR, that keeps the government funded through Dec. 11. As the second ranking House Republican, McCarthy, R-Calif., seemed poised to replace Boehner as Sspeaker.
McCarthy's announcement on Thursday scuttled any hopes of a smooth transition, and focused attention on two upcoming fiscal deadline: Nov. 4, when the government will reach the debt ceiling, and Dec. 11, when authorization for operational funding expires.
This complicates the outlook for the DoD budget, wrote Capital Alpha Partners analyst Byron Callan in a note to investors on Thursday.
"We had been thinking that a worst case for defense was a full-year CR for FY16 to which we assigned a 30 percent probability," Callan wrote. "The underlying tensions leading to McCarthy's decision could suggest a worse scenario, which is one or more short shutdowns and then a full-year CR."
Callan said he would wait and see what the next 48 hours will bring before resetting his probabilities.
Charles Gabriel, also of Capital Alpha, pointed to three likely scenarios in the wake of McCarthy’s decision. One, Boehner, R-Ohio, could opt to continue to serve as Sspeaker, and use his strengthened position to help negotiate a long-term budget deal with Democrats. Two, House Republicans could coalesce around a centrist by the end of October, and new leadership would deal with the upcoming deadlines. Third, a conservative member could ascend to the speakership, which would heighten the likelihood of a shutdown in the near future.
With 218 votes needed to select a new speaker, McCarthy's decision to "walk the plank" rather than seek election with help from Democrats ceded "effective caucus control to 40 rebellious conservatives," Gabriel noted.
Roman Schweitzer, an aerospace and defense policy analyst with Guggenheim Securities, said that a year-long CR would not be as bad for the DoD and defense sector as some believe. It could give the Pentagon more budget flexibility than under the spending caps set but by the Budget Control Act, he said.
"It's going to be up to Boehner to get a deal done to adjust the BCA caps," he said. If Boehner can't strike a deal, it is unlikely that his successor will be able to pull it off, he said.
Schweitzer said he doesn't think a shutdown is very likely, but Thursday's developments made it more likely.
"It's certainly a higher probability than it should be," he said.
Email: aclevenger@defensenews.com
Twitter: @andclev
