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Moody’s warns about risks to US debt in case of government shutdown

The federal government of the United States is facing the prospect of a potential imminent shutdown. This could commence next weekend unless Congress intervenes. Moody’s, the credit rating agency, has warned about the potential negative impact this could have on the United States’ credit rating.

According to Moody’s, past debt limit disputes and a dysfunctional budgeting process in Congress represent weaknesses, especially compared to other countries holding the agency’s highest Aaa rating. The report highlights the lack of medium-term fiscal planning, as evidenced by Congress routinely failing to approve an annual budget. Additionally, it points out limited flexibility due to high costs of mandatory entitlement programs and rising borrowing costs.

Moody’s sovereign risk analyst team, led by William Foster, Senior Vice President of Moody’s Investors Service, states that “a shutdown would be detrimental to the U.S. sovereign rating. While government debt payments would remain unaffected, and a short-lived shutdown would have little impact on the economy, it would underscore the weakness of U.S. institutions and governance relative to other Aaa-rated sovereigns, as highlighted in recent years.”

The significance of Moody’s analysis

Moody’s analysis particularly emphasizes the significant challenges imposed by increasing political polarization on fiscal policymaking. This occurs at a time of declining fiscal strength due to widening fiscal deficits and deteriorating debt sustainability. Moody’s asserts that “debt sustainability is by far the most crucial indicator we use to assess a sovereign’s overall fiscal strength, thanks to the U.S.’s preeminent status as the world’s primary reserve currency and its ability to sustain higher debt levels than most countries.”

The recent increase in yields of U.S. 10-year Treasury notes, reaching 4.548%, the highest level in 15 years, poses an additional hurdle for the government. Higher interest rates result in higher costs for servicing the national debt, which amounts to $33 trillion. According to the Congressional Budget Office, interest payments on the national debt increased by $149 billion compared to the previous year due to higher interest rates.

Moody’s emphasizes that Congress’s consistent inability to agree on annual budgets and approve spending funding suggests that it is unlikely for successive governments to implement fiscal measures that will significantly slow the expected decline in debt sustainability.

Currently, Moody’s assigns the U.S. government an “Aaa” rating with a stable outlook, the highest level of creditworthiness it assigns to borrowers in its rating process. Moody’s is the last major rating agency to maintain the U.S. at its highest credit level, even after its two peers downgraded the federal government’s credit rating during past fiscal crises.

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