US Credit Rating Could Be Downgraded If Government Shuts Down: Moody’s

A Moody's sign on the 7 World Trade Center tower in New York on Aug. 2, 2011. Mike Segar/Reuters

A shutdown of the U.S. government could end up leading to a credit downgrade and would be seen as proof of poor fiscal policymaking in the country, according to rating agency Moody’s.

“Fiscal policymaking is less robust in the U.S. than in many Aaa-rated peers, and another shutdown would be further evidence of this weakness,” Moody’s said in a statement on Monday, according to Reuters.

A shutdown would be proof of political polarization in Washington weakening fiscal policymaking of the United States, Moody’s analyst William Foster told the outlet. This would come at a time when government debt is under pressure due to higher interest rates, he added.

“If there is not an effective fiscal 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,” Mr. Foster said. “And that could lead to a negative outlook, potentially a downgrade at some point if those pressures aren’t addressed.”

Moody’s currently gives the U.S. government an “Aaa” rating with a stable outlook, which is the highest rating the agency grants to borrowers.

It is the last of the three major rating agencies to maintain such a high rating for the United States after S&P Global downgraded the country’s rating to AA+ in 2011 and Fitch downgraded the country to the same level in August this year.

What’s Next

Federal funding is set to run out on Sept. 30, after which the government may shut down. To avoid this, Congress has to pass the 12 annual appropriations bills and send them to President Joe Biden for approval.

Alternatively, it must enact a short-term funding measure called a continuing resolution (CR). Republicans have proposed a CR to extend the shutdown by a month until Oct. 31.

However, the measure has not progressed. Within the GOP, there are disagreements regarding the content of the CR bill. Meanwhile, Democrats do not favor it as the bill includes an 8 percent reduction in federal spending.

When Fitch downgraded the U.S. rating in August, it warned that the move reflected “the expected fiscal deterioration over the next three years,” and a “growing general government debt burden.”

It also blamed the “erosion of governance” in the United States relative to other AA and AAA-rated peers over the past two decades.

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” it said.

Speaking to Reuters, Mr. Foster said that “in this environment of higher rates for longer and pressures building on the debt affordability front, it’s that much more important that fiscal policy can respond.”

“And it looks increasingly challenged because of things like the government shutdown and having come off the debt limit episode, because it’s such a polarized political dynamic in Washington.”

The Shutdown

As no funding is in place ahead of the Oct. 1 new fiscal year, the Biden administration’s Office of Management and Budget has advised agencies to review and update their plans for the shutdown, The Associated Press reported.

The last shutdown in 2018–2019 under the Trump administration lasted for 35 days. Since some funding was approved, it was only a partial shutdown.

The Congressional Budget Office estimated that this shutdown could cost $3 billion to the U.S. economy.

Once a shutdown is triggered, federal agencies will have to cease all nonessential work. No paychecks will be sent as long as the shutdown continues, which would affect millions of federal workers, including military personnel.

Almost 60 percent of federal workers are employed at the Defense Department, Homeland Security, and Veterans Affairs. Some federal offices would also shut down or implement shortened hours.

The operations of businesses closely tied to the government, like federal contractors, could be impacted. Americans applying for government services could experience delays, which would affect passport issuance and firearm permits.

Ernst & Young chief economist Gregory Daco expects a U.S. shutdown to leave a “visible mark on the economy,” according to AFP.

Each week of government shutdown will cost the U.S. economy $6 billion, trimming America’s gross domestic product for the fourth quarter by 0.1 percentage points, he said.

“Apart from the direct macroeconomic consequences of a shutdown, financial markets and private sector confidence could also be affected.”

Trump Says No Compromise

Some House Republicans will not agree to the government spending agreement reached between President Biden and House Speaker Kevin McCarthy (R-Calif.).

This has led to worry among some Republicans that the party may end up being blamed in case a shutdown happens and results in serious consequences to the economy. However, former President Donald Trump recently pushed Republicans not to compromise on their demands.

“The Republicans lost big on Debt Ceiling, got NOTHING, and now are worried that they will be BLAMED for the Budget Shutdown,” President Trump said in a Sept. 25 post on Truth Social.

President Trump said this is incorrect, and that President Biden will take the blame for shutdown.

“Our Country is being systematically destroyed by the Radical Left Marxists, Fascists, and Thugs - THE DEMOCRATS. UNLESS YOU GET EVERYTHING, SHUT IT DOWN!”