Government shutdown looms: Moody’s highlights potential credit rating consequences

The Federal Government of the United States is facing the threat of a possible shutdown. This threat  could start next weekend unless Congress intervenes. If this were to happen, credit rating agency Moody’s has warned that the US credit rating could suffer a negative impact.

Moody’s states that past debt limit standoffs and dysfunctional budget processes in Congress are weaknesses if compared to other countries with an Aaa rating, the agency’s highest rating level.

The report highlighted the lack of medium-term fiscal planning. Demonstrated by Congress’s habitual failure to pass an annual budget, as well as limited flexibility due to high spending on mandatory assistance programs and rising financing costs.

“A shutdown would be negative for the US sovereign rating,” wrote the sovereign risk analyst team led by William Foster, Senior Vice President at Moody’s Investors Service. “Although public debt payments would not be affected, and a brief shutdown would have little chance of disrupting the economy, it would highlight the weakness of the institutional and governance strength of the United States compared to other Aaa-rated sovereigns we have highlighted in recent years.”

Moody’s and fiscal policy

“Specifically, it would demonstrate the significant constraints that growing political polarization imposes on fiscal policy at a time of declining fiscal strength, driven by growing fiscal deficits and deteriorating debt sustainability,” noted Moody’s.

The analysts continued to say that “debt sustainability is by far the best indicator we use to assess the overall fiscal strength of the sovereign, given the US’s preeminent status as a global reserve currency and its ability to sustain higher debt levels than most countries.”

The yield on the US ten-year Treasury note rose to 4.548% on Monday, the highest level in the past 15 years. Higher interest rates mean that the government will have to bear higher costs to service the national debt of $33 trillion. In August, the Congressional Budget Office noted that interest payments on the national debt increased by $149 billion from the previous year due to higher interest rates.

“At this point, Congress’s consistent inability to agree on annual budgets and approve spending appropriations suggests that future governments are unlikely to be able to implement fiscal measures that significantly slow the expected deterioration in debt sustainability,” wrote Moody’s.

Currently, Moody’s assigns the US government an “Aaa” rating with a stable outlook. The highest level of creditworthiness it assigns to borrowers in its rating process. It is the latest major rating agency to maintain the US at its highest credit rating level after its two counterparts downgraded the federal government’s credit rating during past fiscal standoffs.