Moody’s Investors Service, the sole major credit rating agency still awarding the United States its top ‘AAA’ rating, has signaled a diminishing confidence in light of a potential government shutdown.
In the event that this scenario unfolds, although “debt service payments would not be affected, and a short-term shutdown would unlikely disrupt the economy, the situation would underscore the weakness in the institutional and governance strength of the U.S. compared to other AAA-rated sovereigns,” wrote analysts led by William Foster in a report on Monday, as reported by Bloomberg.
The analysts did not explicitly mention a potential downgrade, but they used notably strong language to express their concerns about the trajectory of Congress negotiations to pass a short-term spending bill necessary to avert a government shutdown when the new U.S. fiscal year begins in October.
“A government shutdown would highlight the significant constraints that heightened political polarization continues to place on U.S. fiscal policy formulation during a period of declining fiscal strength, driven by persistent fiscal deficits and deteriorating debt servicing capacity,” Moody’s added.
Markets have been attentive to credit rating actions since Fitch Ratings downgraded the U.S. rating in August, citing concerns over political disputes regarding the debt ceiling that brought the country to the brink of default. Moody’s latest report, while maintaining its rating for the U.S., signals that the sustainability of U.S. debt and the politics surrounding it will remain a topic of concern throughout the year.
House Speaker Kevin McCarthy has shown reluctance to work with Democrats on temporary funding to keep the government open, partly due to concerns about being ousted by hardline members of his own party.
These more radical factions have repeatedly stated that they are not afraid of the consequences of a shutdown, and Moody’s warning may not sway them.
A group of Republican lawmakers from swing districts, the most vulnerable to voter backlash in the event of a government shutdown, is already preparing to rebel against the shutdown. However, due to procedural hurdles, the group may not be able to act quickly enough to prevent it.
Treasury yields remained elevated throughout the day following Moody’s report, with 10-year yields earlier reaching their highest levels since 2007.
“The pressure on U.S. debt servicing capacity is increasing,” said Foster in an interview after the report’s release. “Weaker fiscal policy” resulting in “persistently high fiscal deficits and higher-than-expected interest costs” will ultimately weigh on the U.S. credit rating, he added.
These comments echo those of all three major credit rating agencies in recent years. S&P Global Ratings, the first major rating agency to strip the U.S. of its ‘AAA’ rating in 2011, stated in March that it could lower the U.S. rating again “over the next two to three years if unexpected negative political events weigh on the strength of American institutions and the effectiveness of long-term policy formulation or jeopardize the dollar’s status as the world’s primary reserve currency.”
Moody’s noted that the impact of a shutdown “would be concentrated in areas with a significant government presence” and would depend on the duration of the closure.