Kevin McCarthy’s ouster means chance of government shutdown next month ‘just went up to 80%,’ analyst says

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The House’s historic vote to remove GOP Rep. Kevin McCarthy from the post of speaker is rattling Washington this week, with analysts seeing an impact on a range of funding fights.

Until the 216-210 vote on Tuesday, no House speaker had ever been ousted by what’s called a “motion to vacate.”

What does the development mean for averting a partial government shutdown next month? Could there be significant cuts ahead for domestic spending? What about additional outlays on Ukraine?

Below are some preliminary reactions from analysts.

‘The risk of a shutdown has increased,’ and spending cuts could come as well

“House Speaker McCarthy’s removal is markets
SPX
negative because it makes more intractable Washington’s 2 intertwined political crises — the bipartisan inability to reliably fund the government and the bipartisan inability to address the out-of-control fiscal situation — and further embeds in world markets the view that the U.S. is unable to address out-of-control spending and ballooning debt and deficits,” Terry Haines, founder of Pangaea Policy, said in a note.

“At a minimum, the likelihood of government shutdown in mid-November just went up to 80%, as the House’s inability to do its immediate job of funding the government increases.”

Congress last Saturday avoided a partial government shutdown with a 45-day funding bridge, so lawmakers now face a new deadline of Nov. 17.

Haines warned of the potential for a long period during which worries around federal funding persist, saying, “It’s not a one-off shutdown markets should be concerned about, but increased volatility
VIX
for at least 3 months where markets won’t know final decisions on U.S. government annual spending, particularly in government-dependent sectors including defense
ITA,
semiconductors
SOXX
and healthcare
XLV.

Read more: What McCarthy ouster means for markets as investors fret over congressional ‘dysfunction’

It’s ironic, according to Haines, that it’s “only the few House Republican purists who just deposed McCarthy who even discuss” some of these financial issues, but he added that the “purists again demonstrated they have no plan, organization, will or ability to affect the rest of Washington on any of the issues.”

Other analysts also were seeing a greater chance for a shutdown after McCarthy’s ouster, which was sparked by the former speaker’s reliance on the support of House Democrats to pass the short-term funding measure last Saturday.

“No legislative item will be more important — and more pressing — than how to address a potential shutdown once the current continuing resolution (CR), hastily passed this past weekend, expires on November 17th. The risk of a shutdown has increased as the passage of this CR becomes more of a cautionary tale than an established precedent for the next speaker,” Stephen Myrow, managing partner at Beacon Policy Advisors, said in a note. 

Deutsche Bank strategists led by Jim Reid said: “With conservative Republicans having opposed McCarthy’s deal last weekend, his ouster may raise the risk that we will get a government shutdown in November, or that the Senate is forced to accept spending cuts demanded by House Republicans to avoid a shutdown. So a fiscal risk to keep in mind for later in Q4.”

Related: U.S. government shutdown: Here’s how it could affect you, from food aid to getting your passport

And see: What stock investors need to know about U.S. government shutdowns

Plus: How a government shutdown could complicate Fed’s fight against inflation

Outlook for Ukraine aid is ‘considerably more negative’

U.S. spending on Ukraine as that country resists Russia’s invasion “faces a more uncertain future,” the Eurasia Group’s Clayton Allen and Jon Lieber said in a note.

“Even though a clear majority in the House and Senate support Ukraine aid, the speaker ultimately decides what goes to the floor, and leveraging a government shutdown that no one wants is a powerful tool Ukraine opponents can use to keep the funding out of any short-term deal in November or later in the year,” they wrote.

“This leaves two paths to additional Ukraine aid: a speaker willing to buck a large and growing portion of the conference to pass a bill on the House floor, or Senate Democrats willing to shut down the government by blocking any government funding bill until it includes Ukraine aid.”

The Eurasia Group analysts said the Department of Defense, or DoD, still has some money that can go to Ukraine, but they suggested that the prospects have gotten worse for efforts such as President Joe Biden’s request for an additional $24 billion in security and humanitarian aid for the country.

“The $5 billion in additional aid and drawdown authority remaining in the DoD budget will cover some of Kyiv’s demands in the coming months, but the outlook for major provisioning of U.S. aid is considerably more negative,” they said.

Potential for crypto legislation? Trouble for cannabis-banking bill?

It’s hard to envision the House GOP’s agenda “shifting meaningfully” with a new speaker, but there are “some policy nuances that will depend on who is ultimately elevated,” said BTIG analysts Isaac Boltansky and Isabel Bandoroff in a note.

For example, one top Republican who is viewed as having a chance of becoming the next House speaker — Rep. Tom Emmer of Minnesota — “has been a vocal proponent of digital assets
BTCUSD,
+0.22%,
” they wrote.

Emmer, who has been the No. 3 House Republican, is co-chairman of the Congressional Blockchain Caucus.

Related: Kevin McCarthy ousted as House speaker: Here’s who could replace him

Bad feelings among Republicans and Democrats after Tuesday’s vote could make it tougher to reach deals on issues such as a much-anticipated cannabis-banking bill or expiring tax cuts, according to BTIG’s team.

“From a practical perspective, partisan disdain could make crafting a year-end legislative package more difficult and lessen the likelihood of one-off policy riders (e.g., cannabis
MSOS
banking bill) or sweeping spending shifts (e.g., tax extenders),” they said.

Why would anyone want to be speaker at this point? Boltansky and Bandoroff also weighed in on that issue, which stems from the fact that currently a motion to vacate can be triggered by a single lawmaker.

The BTIG analysts said they think that now in Washington there’s “a firm belief that the House rules package will need to be amended for anyone with staying power to take the gavel.”

Now read: Speaker pro tem McHenry takes swift action to evict Pelosi from honorary ‘hideaway’ office at Capitol

And see: ‘The shot heard round the world’: North Carolina Rep. Patrick McHenry’s gavel slam after Kevin McCarthy’s removal goes viral

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