July 12, 2024

Government Shutdown Looms: What Moody’s Warning Means for the U.S. Credit Rating

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Amid looming concerns over a potential government shutdown, Moody’s, the renowned credit rating agency, has raised a warning flag. The fate of the U.S. credit rating hangs in the balance, and the consequences could be significant.

Moody’s assessment highlights several critical weaknesses in the U.S. financial landscape. These concerns stem from the recurring brinksmanship surrounding the debt limit and the often dysfunctional budgeting process within Congress, setting the U.S. apart from other countries that maintain Aaa ratings – the highest rating tier awarded by the agency.

One glaring issue is the need for medium-term fiscal planning. Congress must consistently approve an annual budget, leaving the nation’s financial future uncertain. Additionally, the high spending on mandatory entitlement programs and increasing borrowing costs limit flexibility, further exacerbating the situation.

Moody’s Senior Vice President, William Foster, expressed the agency’s apprehension: “A shutdown would be credit negative for the U.S. sovereign.” While it’s unlikely to disrupt the economy or affect government debt service payments, it would underscore the fragility of U.S. institutional and governance strength compared to other Aaa-rated sovereigns.

Furthermore, this situation sheds light on the challenges posed by escalating political polarization in fiscal policymaking, coinciding with declining fiscal strength driven by expanding deficits and worsening debt affordability.

The report emphasizes the critical role of debt affordability in assessing fiscal strength, considering the U.S.’s global reserve currency status and capacity to manage higher debt levels than most nations.

Recent developments in the bond market have raised additional concerns. The U.S. 10-year Treasury note yield reached its highest level in 15 years, climbing to 4.548%. Elevated interest rates translate to higher costs for servicing the colossal $33 trillion national debt. In August, the Congressional Budget Office reported a $149 billion increase in interest payments compared to the previous year, primarily due to higher interest rates.

Moody’s outlook remains uncertain, given Congress’s inability to agree on annual budgets and pass appropriations funding. The government will need more time to implement fiscal measures to reverse the anticipated decline in debt affordability. 

Currently, Moody’s assigns the highest creditworthiness rating of “Aaa” with a stable outlook to the U.S. government in its rating process. This rating distinguishes the agency from its peers, as two other major rating agencies previously downgraded the U.S. credit rating during past fiscal standoffs.

Earlier this year, Fitch Ratings downgraded the U.S. credit rating from “AAA” to “AA+” during a debt limit standoff, marking the second time one of the three major rating agencies has downgraded the U.S. credit. The first downgrade occurred in 2011 during a debt limit standoff resolved through a compromise involving automatic spending cuts known as “sequestration.”

As the clock ticks toward a potential government shutdown, the nation awaits a resolution that could have lasting implications on its creditworthiness and economic stability. The lessons of the past serve as a stark reminder of the importance of fiscal responsibility and cooperation in these critical times.

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