Credit rating agency warns US government shutdown would weaken country’s image.
The Only Member of the “Big Three” Agencies Warns of Government Shutdown Impact on U.S. Credit Rating
The United States, known for its top-rated credit status, is at risk of appearing weak compared to other nations if another government shutdown occurs, according to Moody’s Investors Service. While the country’s credit rating has not been downgraded by Moody’s, the agency issued a “credit negative” warning as Congress races to secure funding for various federal government branches before the start of the new fiscal year.
Highlighting Weakness in Institutional and Governance Strength
Moody’s emphasized that although a short-lived shutdown would not disrupt the economy or impact government debt service payments, it would underscore the weakness of the United States’ institutional and governance strength compared to other AAA-rated sovereigns. The agency pointed out the significant constraints imposed by intensifying political polarization on fiscal policymaking, especially during a time of declining fiscal strength due to widening deficits and deteriorating debt affordability.
Over a decade ago, the other two major credit agencies began downgrading the United States from its top-rated ”AAA” position. This downgrade, which occurred amidst rising government budget numbers and a doubling of debt since 2011, could result in increased borrowing costs, higher interest rates, and harm to the economy, according to analysts.
In 2011, S&P lowered the U.S. long-term rating from “AAA” to “AA+” due to political brinkmanship and the mounting debt burden. This decision came shortly after then-President Barack Obama signed legislation to raise the debt ceiling, preventing a potential default on financial obligations.
Just two months ago, Fitch Ratings also downgraded the country’s Long-Term Foreign-Currency Issuer Default Rating from “AAA” to “AA+” following a narrow escape from a debt default over the summer. This downgrade occurred ahead of the ongoing spending showdown in a politically-divided Congress.
Potential Impact on Economy and GDP Forecasts
While Moody’s did not announce a downgrade on Monday, the agency warned of a more significant impact on the economy and GDP forecasts if a government shutdown becomes prolonged and negatively affects national business and consumer confidence or triggers adverse reactions in financial markets.
Moody’s analyst William Foster expressed concerns about the credit profile’s increasingly negative impact if there is no effective fiscal policy response to offset the pressures on U.S. government debt affordability caused by higher interest rates. He emphasized that failure to address these pressures could lead to a negative outlook and potentially a downgrade in the future.
What are the long-term consequences for the U.S. credit rating when a government shutdown disrupts economic activity?
Ed out that repeated government shutdowns over the years have eroded institutional strength and raised doubts about the ability of the U.S. government to function effectively.
This warning from Moody’s is significant because it comes from the only member of the “big three” credit rating agencies that has not downgraded the U.S. credit rating in the past. Standard & Poor’s and Fitch Ratings both downgraded the U.S. from its long-held AAA rating in 2011 during the debt ceiling crisis. Moody’s, on the other hand, has maintained a stable outlook on the U.S. credit rating.
The impact of a government shutdown on the U.S. credit rating can be traced back to the negative effects it has on the economy. A shutdown disrupts various government services, leading to a slowdown in economic activity. It also hampers the confidence of investors and creditors in the stability and reliability of the U.S. government, which can have long-term consequences for the country’s creditworthiness.
Moody’s warning serves as a reminder to Congress of the potential repercussions of another government shutdown. It urges policymakers to find a timely resolution to funding issues and avoid the risk of a disrupted economy and tarnished credit rating. The agency also notes that the impact on the credit rating is not immediate but can materialize over time as doubts grow about the government’s ability to manage its finances.
It is crucial for the United States to maintain a high credit rating as it enables the government to borrow at lower interest rates and ensures the confidence of global investors in the stability of the U.S. financial system. A lower credit rating would result in higher borrowing costs for the government, leading to increased public debt and potentially hampering economic growth in the long run.
Furthermore, a lower credit rating can also affect the United States’ standing in the world economy. As one of the largest economies, the U.S. plays a crucial role in global markets and serves as a benchmark for other countries. A downgrade in the U.S. credit rating would not only impact the country’s credibility but also have broader implications for the global financial landscape.
In conclusion, Moody’s warning about the impact of a government shutdown on the U.S. credit rating highlights the importance of reaching a timely resolution to funding issues and avoiding disruptions to the economy. Maintaining a top-notch credit rating is crucial for the United States’ financial stability and global standing. As Congress races to secure funding, it must keep in mind the potential consequences of a shutdown on the country’s creditworthiness.
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