A U.S. government shutdown would be “credit negative” for the the sovereign rating of the largest economy in the world, Moody’s Investors Service said on Monday.
While the actual economic impact of a potential shutdown is considered relatively limited (assuming the disruption is a short one), the bigger issue is the forces that led to the shutdown, the ratings company said in a FAQ.
“While government debt service payments would not be impacted and a short-lived shutdown would be unlikely to disrupt the economy, it would underscore the weakness of U.S. institutional and governance strength relative to other Aaa-rated sovereigns that [Moody’s has] highlighted in recent years,” it said in a report. “… 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.”
Entities that relay on federal funding for revenue or debt service payments would be the most affected by the economic impact of the shutdown. Those would include some defense contractors; municipal issuers, including mass transit systems; and certain municipal housing sector bonds.
“The most direct impact of a shutdown would be through lower government spending, with an immediate impact on consumption and spending by affected federal workers and contractors,” Moody’s said. During the last shutdown that ended in January 2019, the impact was chiefly felt in areas with a large government presence, such as Washington, DC, itself.
The analysis also points out that while federal workers will get paid back once the shutdown ends, many low-wage private contractors, such as food-service workers and security guards, likely face a permanent loss of income as they aren’t likely to get paid back for work that didn’t get done during the disruption.
Moody’s points to two weaknesses that the U.S. has compared with other Aaa-rated sovereigns — administrations don’t adopt a medium-term budgeting strategy; and the fiscal rule, also called the debt limit, “has little operational relevance and simply adds to political discord and difficulties around the budget-making process.”
In August, Fitch cut its rating on the U.S. to AA+, reflecting expected fiscal deterioration, a growing debt burden, and the erosion of governance related to its peers, even after a deal was reached on the debt ceiling.
In 2011, S&P Ratings cut the U.S. sovereign credit rating to AA+ after the government’s fiscal consolidation plan didn’t appear to be enough to “stabilize the government’s medium-term debt dynamics.”
Earlier, Republicans were divided on a stopgap spending bill, increasing the likelihood of a U.S. government shutdown.
Even with the negative implications for the U.S. sovereign credit rating, the Dollar Index (DXY) rose 0.3% in Monday afternoon trading.