Updated Thursday, December 18, 2014 as of 3:35 AM ET

Shutdown Confrontation May Take Momentum From Debt Standoff

Bloomberg -- A partisan stalemate that partially shut down the U.S. government may lessen the appetite of lawmakers for risking a debt default later this month.

The potential political and economic blow from the shutdown that began today could sap the will of rank-and-file Republicans in Congress to go through with a second fiscal confrontation with President Barack Obama on the heels of this week’s fight, said Dan Meyer, chief of staff to former Republican House Speaker Newt Gingrich and later a congressional lobbyist for President George W. Bush.

“It has the potential to make a significant difference,” Meyer said. Some Republicans “want to play a little too close to the flame here and, frankly, some of them need to get their fingers singed,” Meyer, now a lobbyist with the Duberstein Group, said. “They’ll start feeling the heat pretty quick.”

The federal government’s first partial shutdown in 17 years began with the new fiscal year at midnight. Legislation to fund the government stalled as congressional Republicans stuck with demands for changes in Obama’s signature 2010 Affordable Care Act. Obama and congressional Democrats refused to go along.

MARKET REACTION

Global stocks rebounded this morning after suffering the biggest decline in a month in the runup to the shutdown. Treasuries fell and the dollar weakened.

The MSCI All-Country World Index climbed 0.1 percent to 382.62 at 9:30 a.m. in New York. The Standard & Poor’s 500 Index advanced less than 0.1 percent after the benchmark index retreated 2.6 percent from its last record on Sept. 18. Treasury 10-year yields rose 1.3 basis points to 2.62 percent. The Bloomberg U.S. Dollar Index dropped 0.2 percent.

Representative Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee, said at a Bloomberg Government breakfast this morning that the shutdown deadlock puts Congress “on a very dangerous trajectory” going into a debate over the next major fiscal requirement: raising the nation’s debt limit. Assumptions that Republican congressional leaders would act to avoid a default “may be faulty,” he said.

“The far right of the Republican Party is dictating policy in the House of Representatives right now,” Van Hollen said.

BOEHNER'S CONDITIONS

House Speaker John Boehner, an Ohio Republican, has issued a longer list of demands before he’ll support raising the debt ceiling. U.S. Treasury officials say action is needed by Oct. 17 to raise the current legal limit of $16.7 trillion or the government will default.

Boehner’s conditions include approval of TransCanada Corp.’s Keystone XL pipeline, major revisions to the tax code, a one-year delay of the insurance mandate in the Obama health-care law, means testing of the Medicare insurance program for the elderly, and reductions in government regulations.

To be sure, some analysts argued that inability of the two parties to agree on a short-term funding extension portends even greater difficulty for a debt-limit extension.

Chris Krueger, a Washington analyst for Guggenheim Securities LLC, estimates a 40 percent probability that Congress will fail to pass a debt-limit increase by the Treasury’s announced deadline.

‘DIFFICULT SHOT’

“Washington couldn’t sink the short putt, and the debt ceiling is a much more difficult shot,” Krueger said. “The only thing probably less popular than Obamacare with Republicans is a deal to raise the debt ceiling.”

One former Republican congressional aide said the reactions of the party’s activists and donors to the outcome of the governmentshutdown fight will shape the debt-ceiling battle.

If likely Republican primary voters such as Tea Party followers and funding sources of potential Republican congressional primary candidates, such as the Club for Growth, view concessions won through the shutdown battle as worth the price, they will probably encourage more demands on the debt- ceiling legislation, said the former aide, who asked for anonymity to discuss party strategy.

If not, members will probably choose to seek more modest concessions or avoid a debt-ceiling fight, according to the former aide.

PUBLIC PERCEPTIONS

Party leaders and some rank-and-file Republicans will also be influenced by public perceptions, the former aide said. An improved image or minimal damage to the party in opinion polls would lead to stronger demands in the next fight, while a public backlash would cause a retreat, the aide said.

“If there’s a shutdown and the Republicans lose, I think that Boehner’s going to tell the Tea Party: ‘You tried, you failed, let’s move on,’” said Stan Collender, a onetime Democratic congressional budget aide and now a partner at Qorvis Communications in Washington.

Alec Phillips, an economist in the Washington office of Goldman Sachs Group Inc., said party leaders and most lawmakers are willing to use the government shutdown as a safety valve to release pressure for a debt default, because they consider it less risky.

Steve Bell, a former Senate Republican budget aide, said the government shutdown builds Boehner’s credibility with members of his party who favor a more aggressive approach, while allowing him to wait until the debt ceiling before asking them for a tough vote to accept something anathema to many.

“He’s going to get a vote from his more stubborn wing once, and it looks like he’s going to get it on the debt ceiling, not the governmentshutdown,” said Bell, now a senior director at the Bipartisan Policy Center in Washington.

 

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