[1/2]A general view of the US Capitol, where Congress will return on Tuesday to deal with a series of spending bills before running out of funding and causing a partial US government shutdown, in Washington, US on September 25, 2023. REUTERS/Jonathan Ernst Obtaining licensing rights
NEW YORK (Reuters) – Moody’s said on Monday that a U.S. government shutdown would have negative effects on its credit rating because it would highlight the weak strength of U.S. institutions and governance compared to other highly rated governments.
The credit rating agency said the economic impact was likely to be short-lived.
US government services will be disrupted and hundreds of thousands of federal employees placed on unpaid leave if Congress fails to provide funding for the fiscal year that begins on October 1. The publication of key US economic data of critical importance to policymakers and investors will also be suspended indefinitely. The federal government should shut down.
“The shutdown will have a negative impact on US sovereign credit,” Moody’s, which has a AAA rating for the US government, said in a statement.
“In particular, this will demonstrate the significant constraints that increasing political polarization imposes on fiscal policy-making at a time of declining fiscal strength, due to widening fiscal deficits and deteriorating debt sustainability,” he added.
Congress has so far failed to pass any spending bills to fund federal agency programs in the fiscal year that begins on October 1 amid discord within the Republican Party.
The agency said the most direct impact of the closure would be through cuts in government spending, but warned that the longer the closure lasts, the more negative its impact will be on the broader economy.
“A prolonged shutdown will likely disrupt the US economy and financial markets,” she added.
Moody’s said the closure would not affect government debt payments but would highlight how political polarization affects financial decisions, especially as it would follow the political brinksmanship on the government’s debt ceiling earlier this year.
The debt ceiling crisis, although resolved before a potential default, was a major factor that prompted another credit rating agency, Fitch, to lower its rating for the United States by one notch in August.
“Fiscal policymaking is less robust in the United States than in many of its AAA-rated peers, and another shutdown would be further evidence of this weakness,” Moody’s said.
“Looking ahead, weak fiscal policymaking leading to persistently higher fiscal deficits and higher-than-expected interest costs would pressure the US rating or outlook,” she said.
Reported by Davide Barbuscia. Edited by Sharon Singleton
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