A potential government shutdown in the United States next week could put additional pressure on the country’s credit rating, according to a recent report by Moody’s Investors Service. With less than a week to pass a federal budget, Congress is on the brink of a shutdown on October 1, as House Speaker Kevin McCarthy works to unite House Republicans behind a deal.
Moody’s report states that a shutdown would be “credit negative for the US sovereign.” While a short-lived shutdown is not expected to have a direct impact on government debt service payments or the overall economy, it would highlight the weaknesses in the country’s institutional and governance strength compared to other nations with similar credit ratings.
The report emphasizes that a government shutdown would illustrate the significant constraints imposed by political polarization on fiscal policymaking, especially at a time when the country’s fiscal strength is declining.
If the shutdown were to prolong, it could potentially disrupt both the US economy and financial markets. However, Moody’s acknowledges that any shutdown is more likely to be brief and concentrated in areas with a substantial government presence, such as Washington, D.C.
A credit rating downgrade by Moody’s would result in the US losing its last remaining AAA rating from a major credit rating agency. Fitch Ratings downgraded the nation’s credit rating to AA+ last month due to repeated debt-limit political standoffs. S&P Global, another major credit rating agency, downgraded the country in 2011 during a similar debt ceiling showdown.
For consumers, a credit rating downgrade could lead to higher interest rates on Treasury bonds, which would subsequently affect rates on mortgages and corporate bonds.
FAQ
What is a government shutdown?
A government shutdown occurs when Congress fails to pass a federal budget or a continuing resolution to fund government operations, leading to the temporary closure of non-essential government services.
How does a government shutdown affect the US credit rating?
A government shutdown can put additional pressure on the country’s credit rating as it highlights weaknesses in institutional and governance strength. It may lead to a credit rating downgrade, which could result in higher interest rates on Treasury bonds and other financial instruments.
How does a credit rating downgrade affect consumers?
A credit rating downgrade can lead to higher interest rates on various loans, such as mortgages and corporate bonds, which can impact consumers’ borrowing costs.