Moody’s Alert: Potential Federal Shutdown Could Have ‘Negative’ Impact on US Debt Rating

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A US government shutdown poses a risk to the country’s triple A credit rating, Moody’s has warned. This warning comes amidst a stand-off in Congress that could potentially result in a lack of funding for the federal government.

On Monday, Moody’s, the only major rating agency yet to downgrade the US’s debt, stated that a shutdown would have a “credit negative” impact on the US’s sovereign rating.

This warning follows remarks from congressional leaders and White House officials, who expressed concerns that a shutdown is becoming increasingly likely unless rightwing House Republicans compromise with their own party’s leadership and vote to continue funding the government.

If a shutdown occurs, it could begin as early as this Sunday and lead to the furlough of millions of workers and a halt to certain federal government operations.

Moody’s report on Monday should not be considered an official ratings decision, and the agency believes any shutdown would likely be short and have no effect on government debt service payments.

However, a shutdown would highlight the US’s institutional and governance weaknesses compared to other AAA-rated nations, revealing the constraints imposed by political polarization on fiscal policymaking during a period of declining fiscal strength due to widening fiscal deficits and deteriorating debt affordability.

This current budget dispute follows a prolonged political battle earlier this year over raising the US debt ceiling. In August, Moody’s rival, Fitch Ratings, lowered the US’s triple AAA rating, triggering a sell-off in equity markets. S&P also downgraded the US rating after a budget fight and government shutdown in 2011.

While lower credit ratings typically result in increased borrowing costs for a country, previous downgrades by Fitch and S&P had little impact. There was no immediate market reaction following the release of Moody’s report on Monday.

Approval from both the Republican-controlled House of Representatives and the Democratic-controlled US Senate is required for any government funding deal. Although a majority of senators have expressed support for a short-term measure to fund the government, known as a continuing resolution, several hardline House Republicans, who are advocating for significant spending cuts, have rejected a compromise.

Republican House Speaker Kevin McCarthy remains optimistic that a shutdown can be avoided, questioning why certain members of his own party would want to stop paying the troops, border agents, or Coast Guard. However, his comments were contradicted by former President Donald Trump, the current Republican primary frontrunner, who urged Republicans to follow through with the shutdown threat, suggesting that President Joe Biden would be blamed.

In response, White House Press Secretary Karine Jean-Pierre referred to it as a “Republican shutdown” and criticized extreme House Republicans for driving the government towards a shutdown that should not happen.