McCarthy Ouster Raises Shutdown Risk, Threatens US Sovereign Rating
October 4, 2023
The Leadership Transition in U.S. House
The removal of Kevin McCarthy from the position of U.S. House speaker due to increasing disputes within the Republican majority has intensified concerns over a potential federal government shutdown in the upcoming month. This incident marks the first time in history where the House has replaced its leader, underscoring the emerging governance issues posing a threat to the sovereign rating of the U.S.
The Circumstances of the Removal
The House of Representatives, on Tuesday, voted for McCarthy’s removal as the speaker, just three days after the bipartisan stopgap spending bill was approved to prevent a government shutdown. A small faction of Republicans, advocating for deeper cuts in the federal budget, were successful in removing him from the leadership position. Representative Patrick McHenry has assumed the role of acting speaker, and speaker elections will take place on October 11. The House has decided not to carry out votes on pending FY2024 spending bills until a new speaker is elected. However, House committees can continue conducting business.
Implications and Predictions
Goldman Sachs suggested that this ousting raises the probability of a government shutdown next month. They predict that McCarthy’s successor will face increased pressure to prevent a temporary spending package or additional funding for Ukraine. “The short-term concern lies in the fact that the House’s stalemate will further entangle the already complex calculus surrounding the upcoming funding fight,” shared Isaac Boltansky from BTIG, who predicts a government shutdown in Q4. He also mentioned, “In the long run, dismissing the Speaker in this way is entirely in line with the wider structural concerns about political dysfunction and the country’s debt trajectory.”
Prior Analysis of the Situation
Prior to McCarthy’s removal, Franklin Templeton shared their perspective on the long-term issues facing the U.S. government. They said, “The last-minute compromise from the previous weekend hardly reassures that a shutdown can be averted later this year or in 2024.” They further explained that stubbornness in Washington remains its dominant characteristic and will continue to do so until at least the 2024 elections. Additionally, they noted, “While investors might appreciate bipartisan outcomes, these can also destabilize internal party politics.”