Moody’s warns federal shutdown would be ‘negative’ for US debt rating

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A US government shutdown would threaten the country’s triple A credit rating, Moody’s warned on Monday, amid a stand-off in Congress that risks leaving the federal government without funding.

Moody’s, the last major rating agency yet to have downgraded the US’s debt, on Monday said a shutdown would be “credit negative for the US sovereign”.

The warning came as congressional leaders and White House officials warned a shutdown was growing likely unless a rightwing flank of House Republicans compromised with their own party’s leadership and voted to continue funding the government.

A shutdown could go into effect as early as this Sunday, furloughing millions of workers and bringing a halt to parts of the federal government.

Moody’s report on Monday was not an official ratings decision, and the group said any shutdown would likely be short, and leave government debt service payments unaffected.

But a shutdown would “underscore the weakness of US institutional and governance strength relative to other AAA-rated sovereigns” and show “the significant constraints that intensifying political polarisation put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability”.

The current budget dispute comes on the heels of a prolonged political battle over raising the US debt ceiling, or borrowing limit, earlier this year.

In August, Moody’s rival Fitch Ratings cited an “erosion of governance” as it stripped the US of its triple A rating, triggering a sell off in equity markets. S&P cut its US rating after a budget fight and government shutdown in 2011.

Lower credit ratings typically raise a country’s borrowing costs, although the previous downgrades by Fitch and S&P left little impact. There was no immediate market reaction following the publication of Moody’s report on Monday.

Any government funding deal needs to be approved by both the Republican-controlled House of Representatives and the US Senate, which the Democrats control by a razor-thin margin.

While a majority of senators have signalled support for a short-term measure, known as a continuing resolution, to keep funding the government, several hardline House Republicans who are calling for deep spending cuts have rejected a compromise.

Republican House speaker Kevin McCarthy on Monday insisted a shutdown could be avoided. “Why would they want to stop paying the troops, or stop paying the border agents or the Coast Guard?” he said, referring to the holdouts in his own party. “I don’t understand how that makes you stronger.”

But his comments were undercut by former president Donald Trump, the current Republican primary frontrunner, who used a social media post to encourage Republicans to follow through with their shutdown threat, saying public blame would fall on President Joe Biden.

White House press secretary Karine Jean-Pierre responded on Monday, saying that it would be a “Republican shutdown”. She added: “Extreme House Republicans . . . are marching us towards a government shutdown that shouldn’t be happening.”