John Boehner’s unexpected resignation, set to take effect later this month, rekindles worries about Congress’s effectiveness from the past four years. Congress needs to raise the debt limit by November 5th and reach a spending agreement by December 11th. If recent history is any indicator, there is plenty of potential for turmoil, and a leadership transition exacerbates uncertainty rather than placates it. In 2011, for instance, Congress failed to reach a timely agreement to raise the debt limit, threatening sovereign default, and culminating in Standard & Poor’s rating agency downgrading the United States’ credit rating from ‘AAA’ to ‘AA+’. In the fall of 2013, Congress failed to agree on a spending deal, resulting in a temporary shutdown, furloughed public-sector employees and gyrations in the bond market. Goldman Sachs expects that deals are likely to be reached in both events this fall, with perhaps less volatility than the previous iterations of these scenarios – Congress has learned its lesson, they argue – but the effects of the heightened volatility relative to earlier this year are worsened by Boehner’s resignation. The potential for Congressional upheaval causing missed upcoming deadlines produces more ‘left-tail’ risk, but these scenarios still remain highly unlikely in our opinion.
Sources: GS, Bloomberg, SNWAM Research