Moody’s is warning that a federal government shutdown on Oct. 1 would likely result in a downgrade of its credit rating on the U.S. economy. This warning comes as the leading credit rating agency emphasizes the importance of Congress continuing to fund the federal government past the end of the current fiscal year on Sept. 30.
Failure to continue funding the government could have dire consequences for the economy and stock markets. According to the rating agency, that would result in a damaging downgrade from the current top “AAA” credit rating enjoyed by the United States.
A Warning From the Credit Rating Agencies
Moody’s currently assigns the U.S. government its highest credit rating and gives the country a “stable outlook.” However, Moody’s is the last major credit rating agency to maintain the highest rating on the United States. Earlier this year, Fitch Ratings downgraded the U.S. government one notch to “AA+.” That’s the same rating that S&P Global assigned the U.S. back in 2011 following a “similar debt ceiling fight.”
Both Fitch and S&P Global cited political dysfunction in Washington, D.C. and growing debt concerns as the main reasons for their lowered U.S. credit ratings. Fitch noted the continual political brinkmanship that takes place with regards to raising the ceiling on the federal debt (which now stands at $33 trillion) as well as growing risks that the U.S. might default on its debt payments — a historic event that would destabilize the global economy and send stocks into a tailspin. Now, Moody’s is raising those same concerns.
A Lack of Progress
Of course, the warning from Moody’s is being taken seriously in Washington. In an article from Reuters, one U.S. Treasury spokesperson is quoted as saying that the Moody’s report provides “further evidence that a shutdown could undercut our current economic momentum.” In a statement, National Economic Council Director and top advisor Lael Brainard also said that a federal shutdown “would be reckless, create completely unnecessary risks for our economy, and lead to disruptions for communities and families.”
Despite rising pressure, Congress has failed to pass any of the spending bills needed to fund federal programs in the new fiscal year beginning on Oct. 1. A cohort of hardline Republicans are refusing to negotiate or pass any of the needed legislation, calling instead for deep budget cuts and renewed action along the border between the U.S. and Mexico. The fact that both the Senate and House of Representatives are narrowly divided between Democrats and Republicans is not helping negotiations, either.
What’s Next?
The stakes are high and getting higher as the deadline to avoid a government shutdown draws near. Moody’s warning of a potential credit rating downgrade is the latest sign that failure to fund the federal government into the new fiscal year will have consequences for the U.S. economy and markets. Stocks gyrated in the days after Fitch issued its downgrade in August of this year. Unless the current logjam is broken on Capitol Hill, expect more volatility in the days ahead.
On the date of publication, Joel Baglole did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
