Government shutdown would be "credit negative" for US, says Moody's

A government shutdown would be "credit negative" for the US economy, warned Moody's Investors Service in a report late Monday.

The agency, which still rates the US as 'Aaa stable' – the highest rating of creditworthiness it can give – said that the longer the shutdown persists, the more negative it would be on the broader economy, and wider financial markets.

Government shutdowns tend to happen when Congress cannot agree on funding legislation by the time the new fiscal year begins, which in this case is 1 October.

"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 US institutional and governance strength relative to other Aaa-rated sovereigns that we have highlighted in recent years," Moody's wrote in a statement.

"In particular, 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."

Moody's pointed out that the last government shutdown, which lasted for a record 35 days and ended in January 2019, the economic impact was concentrated in areas with a large government presence, such as Washington DC.

"A lingering shutdown would have a broad-based negative effect on the US economy. Suspended routine government operations would start to weigh more broadly on economic activity if the shutdown persists. The longer the shutdown lasts, the more it will strain liquidity for defense services contractors and certain municipal bond issuers that rely on federal funding," Moody's explained.

"In addition, certain government services may be paused or slowed, particularly if they are considered non-essential. A government shutdown could disrupt activities such as permitting and environmental reviews, government data reporting, processing of tax rebates and subsidies, import and export license processing, IPO application reviews, and loans to small businesses and homeowners."