Moody’s Warns US Shutdown Harmful to National Credit

TL/DR –

Moody’s, a credit rating agency, warned that a potential U.S. government shutdown could negatively impact the nation’s credit. The warning comes a month after Fitch downgraded the U.S. by a notch due to a debt ceiling crisis. A potential shutdown would indicate political polarization in Washington is weakening fiscal policymaking, which alongside rising interest rates could lead to increasingly negative impact on the country’s credit profile leading to a downgrade if not addressed.

US Government Shutdown Would Negatively Impact Credit Rating

The US Capitol is set to tackle a series of spending bills to prevent a partial U.S. government shutdown this coming Tuesday. Credit rating agency Moody’s warns of negative impacts on the country’s credit following this potential shutdown.

Moody’s report came a month after Fitch downgraded the U.S. by one notch due to a debt ceiling crisis. If Congress fails to provide funding for the fiscal year beginning Oct. 1, hundreds of thousands of federal workers would be furloughed without pay and government services disrupted.

The increasing polarization in Washington that leads to potential shutdowns demonstrates how fiscal policymaking is faltering, according to Moody’s analyst William Foster. This comes at a worrying time as US government debt affordability is strained due to higher interest rates.

Moody’s currently holds an “Aaa” rating for the US government – the highest creditworthiness it assigns. The rating agency is the last major agency to give such a rating after Fitch downgraded the US government triple A rating to AA+ in August.

According to Moody’s, while a government shutdown would have a limited and short-lived economic impact caused by lower government spending, the longer it persists, the greater the detrimental effect on the broader economy. Congress has yet to pass spending bills to fund federal agency programs for the fiscal year starting Oct. 1 due to a Republican Party feud.

While the potential shutdown would not impact government debt payments, it follows closely after political brinkmanship around the US debt limit threatened to cause a US sovereign debt default. This crisis, though eventually resolved, was a major factor in Fitch’s downgrade of the U.S. rating last month.