Moody’s warns US government shutdown would be ‘credit negative’

By Davide Barbuscia

NEW YORK (Reuters) -A U.S. government shutdown would have negative implications for its credit assessment as it would highlight the weakness of U.S. institutional and governance strength compared to other top-rated governments, Moody’s (NYSE:) said on Monday.

However, the economic impact would likely be short-lived, the credit ratings agency said.

U.S. government services would be disrupted and hundreds of thousands of federal workers furloughed without pay if Congress fails to provide funding for the fiscal year starting Oct. 1. The publication of major U.S. economic data of critical importance to policymakers and investors will also be suspended indefinitely should the federal government shut down.

“A shutdown would be credit negative for the US sovereign,” Moody’s, which has a triple-A rating for the U.S. government, said in a statement.

“In particular, it would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability,” it said.

Congress so far has failed to pass any spending bills to fund federal agency programs in the fiscal year starting on Oct. 1 amid a feud within the Republican Party.

The most direct impact of a shutdown would be through lower government spending, said the agency, warning however that the longer the shutdown lasts, the more negative its impact would be on the broader economy.

“A prolonged shutdown would likely be disruptive both to the US economy and financial markets,” it said.

The shutdown would not impact government debt payments but it would highlight how political polarization is impacting fiscal decisions, particularly as it would follow political brinkmanship on the government’s debt ceiling earlier this year, said Moody’s.

The debt ceiling crisis, even though it was resolved before a potential debt default, was a major factor leading another credit rating agency, Fitch, to downgrade its U.S. rating by one notch in August.

“Fiscal policymaking is less robust in the US than in many Aaa-rated peers, and another shutdown would be further evidence of this weakness,” Moody’s said.

“Looking ahead, weaker fiscal policymaking that leads to persistently high fiscal deficits and higher-than-expected interest costs would put pressure on the US rating or outlook,” it said.