Moody's warns US government shutdown bad for country's credit

By Davide Barbuscia

NEW YORK (Reuters) -A U.S. government shutdown would harm the country's credit, rating agency Moody's said on Monday, a stern warning coming one month after Fitch downgraded the U.S. by one notch on the back of a debt ceiling crisis.

U.S. government services would be disrupted and hundreds of thousands of federal workers furloughed without pay if Congress fails to provide funding for the fiscal year starting Oct. 1.

A possible shutdown would be further evidence of how political polarization in Washington is weakening fiscal policymaking at a time of rising pressures on U.S. government debt affordability because of higher interest rates, Moody's analyst William Foster told Reuters.

"If there is not an effective fiscal policy response to try to offset those pressures ... then the likelihood of that having an increasingly negative impact on the credit profile will be there," said Foster. "And that could lead to a negative outlook, potentially a downgrade at some point, if those pressures aren't addressed."

Moody's rates the U.S. government "Aaa" with a stable outlook, the highest creditworthiness it assigns to borrowers. It is the last major agency to maintain such a rating for the U.S. after Fitch downgraded the government by one notch in August to AA+ - the same rating assigned by S&P Global in 2011.

"Fiscal policymaking is less robust in the U.S. than in many Aaa-rated peers, and another shutdown would be further evidence of this weakness," Moody's said in a statement.

President Joe Biden's top economic adviser, Lael Brainard, said the Moody's comment highlighted the risks caused by the congressional maneuvering.

"Today's statement from Moody's underscores that a Republican shutdown would be reckless, create completely unnecessary risks for our economy, and lead to disruptions for communities and families across the country," Brainard, director of the National Economic Council, said in a statement.

"Congress must do its job and keep the government open."

A Treasury spokesperson said the Moody's report delivered "further evidence that a shutdown could undercut our current economic momentum" at a time when inflation and unemployment were both below 4%.

Moody's said the economic impact of a shutdown would likely be limited and short-lived, with the most direct effect from lower government spending, and the negatives growing the longer the shutdown lasts.

Congress so far has failed to pass any spending bills to fund federal agency programs in the fiscal year starting on Oct. 1 amid a Republican Party feud.

The shutdown would not affect government debt payments. Earlier this year political brinkmanship around the U.S. debt limit threatened to cause a U.S. sovereign debt default.

That crisis, even though it was eventually resolved before any missed debt payment, was a major factor leading Fitch's downgrade last month.

"In this environment of higher rates for longer and pressures building on the debt affordability front, it's that much more important that fiscal policy can respond," said Foster at Moody's.

"And it looks increasingly challenged because of things like the government shutdown and having come off the debt limit episode, because it's such a polarized political dynamic in Washington," he said.

(Reporting by Davide Barbuscia; additional reporting by Andrea Shalal in Washington; Editing by Megan Davies, Sharon Singleton, Josie Kao and Richard Chang)