Moody’s warns US government shutdown bad for country’s credit

Turbulent times: Speaker of the House Kevin McCarthy commenting on plans to avert a shutdown. Thousands of federal workers would be furloughed without pay if Congress fails to provide funding for the financial year starting on Oct 1. — AFP

NEW YORK: A US government shutdown would negatively impact the country’s credit, credit rating agency Moody’s says, a stern warning coming one month after Fitch downgraded the US by one notch on the back of a debt ceiling crisis.

US government services would be disrupted and hundreds of thousands of federal workers furloughed without pay if Congress fails to provide funding for the financial year starting Oct 1.

A possible shutdown would be further evidence of how political polarisation in Washington is weakening financial policy making at a time of rising pressures on US government debt affordability because of higher interest rates, Moody’s analyst William Foster told Reuters.

“If there is not an effective financial policy response to try to offset those pressures, then the likelihood of that having an increasingly negative impact on the credit profile will be there,” said Foster.

“And that could lead to a negative outlook, potentially a downgrade at some point, if those pressures aren’t addressed.”

Moody’s has an Aaa rating for the US government with a stable outlook, the highest creditworthiness it assigns to borrowers.

It is the last major agency with such a rating after Fitch downgraded the US government triple A rating by one notch in August to AA+, the same rating assigned by S&P Global in 2011.

“Financial policy making is less robust in the US than in many Aaa-rated peers, and another shutdown would be further evidence of this weakness,” Moody’s said in a statement.

The economic impact of a shutdown would likely be limited and short-lived, with the most direct economic impact caused by lower government spending.

Of course, the longer the shutdown lasts, the more negative its impact would be on the broader economy, said Moody’s.

Congress so far has failed to pass any spending bills to fund federal agency programmes in the financial year starting on Oct 1 amid a Republican Party feud.

The shutdown would not impact government debt payments but it would come just a few months after political brinkmanship around the US debt limit threatened to cause a US sovereign debt default.

That crisis, even though it was eventually resolved before any missed debt payment, was a major factor leading Fitch to downgrade its US rating by one notch last month.

“In this environment of higher rates for longer and pressures building on the debt affordability front, it’s that much more important that financial policy can respond,” said Foster at Moody’s. — Reuters

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