Moody’s has warned that the US government shutdown will affect the country’s economy

New York,Updated: Sep 26, 2023 09:58 IST

Ratings agency Moody’s said on Monday that a U.S. government shutdown would hurt the nation’s debt, a dire warning a month after Fitch downgraded America by one notch amid the debt ceiling crisis.

If Congress fails to provide funding for the fiscal year that begins Oct. 1, U.S. government services will be disrupted and hundreds of thousands of federal workers will be furloughed without pay.

A possible shutdown would be further evidence of how political polarization in Washington is weakening fiscal policymaking as pressures on U.S. government borrowing from higher interest rates mount, Moody’s analyst William Foster told Reuters.

„If there isn’t an effective fiscal policy response to deal with those pressures … it has the potential to have an increasingly negative impact on the credit profile,” Foster said. „That can lead to a negative outlook, and if those pressures aren’t addressed, there could be a downgrade at some point.”

Moody’s rates the US government at „Aaa” with a stable outlook, the highest credit rating it offers to borrowers. It is the last major agency to maintain such a rating for the U.S., after Fitch downgraded the government one step to AA+ in August, the same rating given by S&P Global in 2011.

„Financial policymaking remains less robust than many Aaa-rated peers in the US, and another shutdown would be further evidence of this weakness,” Moody’s said in a statement.

Lael Brainard, a top economic adviser to President Joe Biden, said Moody’s comments highlighted the dangers of congressional maneuvering.

„Today’s report from Moody’s underscores that a Republican shutdown would be irresponsible, create completely unnecessary risks to our economy, and disrupt communities and families across the country,” Brainard, director of the National Economic Council, said in a statement.

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„Congress needs to do its job and open the government.”

A Treasury spokesman said the Moody’s report provided „further evidence that a strike would slow our current economic momentum” at a time when both inflation and unemployment were below 4 percent.

Moody’s said the economic impact of the shutdown would be limited and short-lived, with a direct effect of lower government spending the longer the shutdown lasts.

Congress has yet to pass any spending bills to fund federal agency programs in the fiscal year that begins Oct. 1 amid Republican hostility.

The shutdown will not affect government debt repayments. Earlier this year, political interference surrounding the US debt ceiling threatened a US sovereign debt default.

That crisis was a major factor in Fitch’s downgrade last month, although it was resolved before any defaulted debt was paid.

„In this environment of long-term high rates and pressures on the credit affordability front, fiscal policy responsiveness is critical,” said Foster at Moody’s.

„It looks increasingly challenging because of things like the government shutdown and the fallout from the debt ceiling episode because it’s a polarized political movement in Washington,” he said.

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September 26, 2023

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