Goldman Sachs to clients: Shutdown could be a good thing

Goldman Sachs told its clients Friday a short government shutdown could be a good thing for financial markets and the economy.

Analyst Alec Phillips argued a closure of the government could ease passage of legislation to increase the debt ceiling. That would be a good trade, he said, since the economic damage of a debt default would be far worse than a shutdown.

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“It would be a mistake to interpret a shutdown as implying a greater risk of a debt limit crisis, in our view. It would not be surprising to see a more negative market reaction to a shutdown than would be warranted by the modest macroeconomic effect it would have,” Phillips wrote to Goldman clients.

“We suspect that many market participants would interpret a shutdown as implying a greater risk of problems in raising the debt limit. This is not unreasonable, but we would see it differently. “

Phillips said the bank would “be surprised if congressional Republicans would want to risk another difficult situation only a couple of weeks later,” after shutting down the government.

“The upshot is that while a shutdown would be unnecessarily disruptive, it might actually ease passage of a debt limit increase,” he said. 

Phillips said developments in recent days have increased the odds of a shutdown, but Goldman still thinks a last-minute deal is more likely. 

He also predicted that the debt ceiling would ultimately be raised after some sort of negotiation, even though at this point, the White House and Democrats say they will not make a deal. 

“We assume that the debt limit increase will follow the same general path as most other recent fiscal battles: the House passes legislation that appeals to House Republicans, then the Senate passes legislation that is the product of some negotiation, which the House eventually accepts, perhaps with some additional modifications,” he wrote.

The client note does say, however, that the laundry list of demands House leaders are trying to attach to the debt limit could make a deal more difficult than a traditional budget agreement. That is because middle ground on political issues like ObamaCare and the Keystone XL pipeline is harder to find than on a set of spending levels. 

“What makes the current debt limit discussion different from the 2011 debt limit increase is the focus on issues with political appeal but in many cases limited or no fiscal effect,” Phillips wrote.