While a government shutdown is "quite unlikely," the "twin threats" of a government shutdown and debt default that Congress must tackle when it returns next week could "roil the markets," particularly if the government does indeed shut down or lawmakers agree only to push that deadline back a few months.
So says analyst Andy Friedman of The Washington Update in his latest white paper, released Wednesday. A "volatile September" may well be in store, he says, if Congress fails to deal with the looming debt limit crisis.
The last debt limit crisis, in August 2011, "produced a difficult month for the markets (in what was otherwise a strong year)," Friedman says. But perhaps this time will be different, he says, and today's markets have developed "'Washington crisis fatigue.'" After all, he continues, the sequestration spending cuts "did not thwart the market run-up this spring."
But Friedman predicts that "Congress will not allow the United States government to default on its national debt."
However, the negotiations should be heated. As it stands now, Congress only has enough funds to keep the government operating through Sept. 30. If Congress fails to appropriate additional funds during September, the federal government will shut down Oct. 1.
As Friedman notes, House Speaker John Boehner, R-Ohio, has said he will propose stopgap legislation without conditions that would fund the federal government for a few more months at 2013 levels. If Congress adopts such a resolution, the funding deadline will be pushed later into the year.
But a second, and what Friedman calls "a more important," deadline looms: the U.S. government has once again hit its borrowing limit.
"Congress had authorized the federal government to borrow only through May 18, 2013," Friedman says. "Since that date, the government has continued to operate using current tax receipts and funds in accounts set aside for future expenses. But, according to the Treasury Department, by mid-October the government will need to borrow additional funds to pay its bills, including interest on its outstanding debt." Either Congress will have to raise the debt limit or the U.S., unable to borrow to pay interest, will default on the national debt.
