Finance & Economics

Moody’s Warns US Government About Consequences of Shutdown for Country’s Credit

Moody’s warned that the shutdown of the United States government, which is currently being assessed as a potentially possible scenario for the development of events in the country, is a threat to global markets and may also become a factor of negative impact on the US credit rating.

Moody's Warns US Government About Consequences of Shutdown for Country's Credit

The agency states that the dysfunction in Washington, D.C., will have consequences for the rating of the US. Currently, Moody’s is the only one of the Big Three credit agencies that assign the United States an AAA rating with a stable outlook. This indicator is the gold standard of creditworthiness.

According to Moody’s, the potential implementation of a negative scenario will be evidence of significant limitations that are observed in the process of developing fiscal policy during a period of declining financial stability due to a decrease in the availability of debt and an increase in the deficit of funds. These restrictions, according to experts, are also the result of increasing political polarization.

Capitol Hill has several days during which shutdown can be prevented. A negative scenario can be avoided by passing a spending bill by October 1. If measures to remedy the situation, the development of which has a clearly negative vector, are not taken, the government will be left without funding. In the case of the worst-case scenario, hundreds of thousands of federal employees will not be able to receive a salary. This will cause the shutdown of some of the most important government services.

Moody’s analyst William Foster, in a commentary for the media, said that in the absence of an effective fiscal policy measure, the risk of a negative impact of the current state of affairs on the creditworthiness of the United States will remain. According to him, if the pressure is not eliminated, a negative forecast may be realized, providing for a downgrade of the credit rating.

In Washington, DC, there is currently a situation that can be described as a stalemate. A group of Republican members of the House of Representatives refuses to reach a compromise with the leadership of their party over the spending bill.

Moody’s also predicts that the shutdown is likely to be short-lived and for this reason will not affect payments for servicing government debt.

The current state of affairs draws investors’ attention to the creditworthiness of the United States. Interest rates on sovereign bonds demonstrate the dynamic of growth. This trend is driven by concerns that interest rates will remain at a high level for a longer period than initially expected.

Kyle Rodda, Senior Financial Market Analyst at Capital.com, suggests that agency estimates for most government debts indicate dysfunction in the United States government.

Moody’s warning was described by some experts as a reminder of the costs of an unstable government.

Last month, Fitch downgraded the US government’s top credit rating. Representatives of this organization stated the trend of gradual deterioration of management standards, which has signs of a systematic process and does not show prospects for improvement. This statement is largely due to the scandal related to the increase in the debt ceiling of the United States.

Jamie Dimon, head of bank JPMorgan, suggested that interest rates in the US could rise to 7%. He described this scenario as the worst-case in conditions of stagflation.

Last week, the Federal Reserve left the key interest rate in the range of 5.25%-5.5%. At the same time, most politicians expect that by the end of this year, there will be another increase in the indicator by the end of this year.

Many analysts are convinced that the Fed is nearing the end of the cycle of rising interest rates. Jamie Dimon says that many businesses are not ready for a further increase in this indicator.

Lael Brainard, chief economic adviser to US President Joe Biden, said Moody’s warning was reminiscent of the risks posed by maneuvering Congress. She noted that a Republican shutdown would be reckless, would provoke unnecessary risks to the American economic system, and would cause disruptions to communities and families across the country.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.