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POLITICS

How could the government shutdown affect US credit rating?

If the US government stopped running even for a short period of time it would be disastrous for the economy and could lead to another credit downgrade.

Update:
If the US government stopped running even for a short period of time it would be disastrous for the economy and could lead to a downgrade.
LEAH MILLISREUTERS

An announcement by credit rating company Moody’s that the US’s credit worthiness could be under threat puts more pressure on House Republicans.

“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.

A government shutdown is looking increasingly likely; House Majority Leader Kevin McCarthy has been unable to get Republicans in the House to support his plans alongside Senate Democrats, while right-wing Republicans have said any deal with the Democrats will cost McCarthy his job.

A credit rating is an assessment of a country’s ability to repay debts. It is determined by credit bureaus based on factors such as financial history, payment patterns, and outstanding obligations. The lower the rating, the riskier a loan from that nation. AAA is the highest score.

Why are credit rating’s important?

Credit rating agencies, such as Moody’s, Standard & Poor’s, and Fitch, closely monitor the fiscal health and stability of governments. A prolonged shutdown will lead these agencies to reconsider their assessments of the US government’s creditworthiness; a downgrade in the credit rating would result in higher borrowing costs for the government and and weaken investor support in the US economy.

Credit ratings have been sunk by shutdowns before; 5 August 2011. It was the first time the rating had fallen below AAA. Moody’s is the last credit agency remaining to allocate such a score the the US government.

During a government shutdown, various government agencies may furlough employees, which can lead to delays in payments and services. This includes delays in paying government debt obligations, such as Treasury bonds. If the US government were to default on its debt obligations, it would have a severe negative impact on its credit rating, not to mention the global financial turmoil it would cause.